ConnectOne Bancorp, Inc. 10-Q

Item 1. Financial Statements CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION     (in thousands, except for share data) September 30,   December 31,     2023   2022       (unaudited)         ASSETS             Cash and due from banks $ 56,170   $ 61,629   Interest-bearing deposits with banks   197,128     206,686   Cash and cash equivalents   253,298     268,315                 Investment securities   581,867     634,884   Equity securities   17,677     15,811                 Loans held-for-sale   -     13,772                 Loans receivable   8,181,109     8,099,689   Less: Allowance for credit losses - loans   88,230     90,513   Net loans receivable   8,092,879     8,009,176                 Investment in restricted stock, at cost   49,387     46,604   Bank premises and equipment, net   28,432     27,800   Accrued interest receivable   46,795     46,062   Bank owned life insurance   236,009     231,328   Right of use operating lease assets   11,229     10,179   Other real estate owned   -     264   Goodwill   208,372     208,372   Core deposit intangibles   6,222     7,312   Other assets   146,718     125,069   Total assets $ 9,678,885   $ 9,644,948   LIABILITIES             Deposits:             Noninterest-bearing $ 1,224,125   $ 1,501,614   Interest-bearing   6,214,370     5,855,008   Total deposits   7,438,495     7,356,622   Borrowings   887,590     857,622   Subordinated debentures, net   79,313     153,255   Operating lease liabilities   12,424     11,397   Other liabilities   72,909     87,301   Total liabilities   8,490,731     8,466,197                 COMMITMENTS AND CONTINGENCIES                               STOCKHOLDERS’ EQUITY             Preferred Stock, no par value; $ 1,000 per share liquidation preference; Authorized 5,000,000 shares; issued 115,000 shares as of September 30, 2023 and as of December 31, 2022; outstanding 115,000 shares as of September 30, 2023 and as of December 31, 2022   110,927     110,927   Common stock, no par value: Authorized 100,000,000 shares; issued 42,122,948 shares as of September 30, 2023 and 41,942,149 shares as of December 31, 2022; outstanding 38,621,970 shares as of September 30, 2023 and 39,243,123 as of December 31, 2022   586,946     586,946   Additional paid-in capital   32,027     30,126   Retained earnings   579,776     535,915   Treasury stock, at cost 3,500,978 common shares as of September 30, 2023 and 2,699,026 as of December 31, 2022   ( 68,108 )   ( 52,799 ) Accumulated other comprehensive loss   ( 53,414 )   ( 32,364 ) Total stockholders’ equity   1,188,154     1,178,751   Total liabilities and stockholders’ equity $ 9,678,885   $ 9,644,948     See accompanying notes to unaudited consolidated financial statements.   3 Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited)       Three Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022     2023     2022   (dollars in thousands, except for per share data)                                 Interest income                                 Interest and fees on loans   $ 115,405     $ 90,731     $ 333,356     $ 248,041   Interest and dividends on investment securities:                                 Taxable     4,128       4,063       12,386       8,487   Tax-exempt     1,136       1,083       3,475       2,708   Dividends     907       438       2,750       943   Interest on federal funds sold and other short-term investments     2,110       665       9,141       1,098   Total interest income     123,686       96,980       361,108       261,277   Interest expense                                 Deposits     56,043       13,299       146,844       24,018   Borrowings     5,286       5,520       20,980       13,149   Total interest expense     61,329       18,819       167,824       37,167   Net interest income     62,357       78,161       193,284       224,110   Provision for credit losses     1,500       10,000       5,500       14,450   Net interest income after provision for credit losses     60,857       68,161       187,784       209,660   Noninterest income                                 Deposit, loan and other income     1,605       1,969       4,553       5,578   Income on bank owned life insurance     1,597       1,521       4,681       4,069   Net gains on sale of loans held-for-sale     633       262       1,232       1,519   Net losses on equity securities     ( 273 )     ( 430 )     ( 674 )     ( 1,431 ) Total noninterest income     3,562       3,322       9,792       9,735   Noninterest expenses                                 Salaries and employee benefits     22,276       21,025       66,289       59,470   Occupancy and equipment     2,738       2,600       8,176       7,262   FDIC insurance     1,800       720       4,465       2,051   Professional and consulting     1,834       1,980       5,960       5,896   Marketing and advertising     554       461       1,642       1,238   Information technology and communications     3,487       2,747       10,192       8,414   Amortization of core deposit intangibles     347       409       1,090       1,276   Other components of net periodic pension expense     ( 25 )     ( 143 )     ( 76 )     ( 429 ) Increase in value of acquisition price     -       -       -       1,516   Other expenses     2,773       2,344       8,366       6,382   Total noninterest expenses     35,784       32,143       106,104       93,076   Income before income tax expense     28,635       39,340       91,472       126,319   Income tax expense     7,228       10,425       23,742       33,665   Net income     21,407       28,915       67,730       92,654   Preferred dividends     1,509       1,509       4,527       4,527   Net income available to common stockholders   $ 19,898     $ 27,406     $ 63,203     $ 88,127   Earnings per common share                                 Basic   $ 0.51     $ 0.70     $ 1.62     $ 2.24   Diluted     0.51       0.70       1.61       2.23     See accompanying notes to unaudited consolidated financial statements.   4 Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)       Three Months Ended     Nine Months Ended       September 30,     September 30,   (dollars in thousands)   2023     2022     2023     2022   Net income   $ 21,407     $ 28,915     $ 67,730     $ 92,654   Other comprehensive income (loss):                                                                   Unrealized holding losses on available-for-sale securities arising during the period     ( 32,285 )     ( 39,912 )     ( 36,060 )     ( 94,428 ) Tax effect     9,177       11,471       10,087       27,178   Net of tax     ( 23,108 )     ( 28,441 )     ( 25,973 )     ( 67,250 )                                   Unrealized gains on cash flow hedges     9,768       16,969       19,832       44,253   Tax effect     ( 2,938 )     ( 5,094 )     ( 5,966 )     ( 13,381 ) Net of tax     6,830       11,875       13,866       30,872                                     Reclassification adjustment for realized gains on cash flow hedges     ( 4,793 )     ( 1,178 )     ( 13,013 )     ( 524 ) Tax effect     1,442       343       3,915       159   Net of tax     ( 3,351 )     ( 835 )     ( 9,098 )     ( 365 )                                   Unrealized gains on pension plan     -       -       -       2,187   Tax effect     -       -       -       ( 567 ) Net of tax     -       -       -       1,620                                     Reclassification adjustment for realized losses on pension plan included in net income     74       17       222       49   Tax effect     ( 22 )     ( 5 )     ( 67 )     ( 14 ) Net of tax     52       12       155       35                                     Total other comprehensive loss     ( 19,577 )     ( 17,389 )     ( 21,050 )     ( 35,088 )                                   Total comprehensive income   $ 1,830     $ 11,526     $ 46,680     $ 57,566     See accompanying notes to unaudited consolidated financial statements.   5 Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY (unaudited)       Three Months Ended September 30, 2023                                               Accumulated                               Additional                     Other     Total       Preferred     Common     Paid-In     Retained     Treasury     Comprehensive     Stockholders’   (in thousands, except share data)   Stock     Stock     Capital     Earnings     Stock     (Loss) Income     Equity   Balance as of June 30, 2023   $ 110,927     $ 586,946     $ 30,740     $ 566,498     $ ( 61,877 )   $ ( 33,837 )   $ 1,199,397   Net income     -       -       -       21,407       -       -       21,407   Other comprehensive loss, net of tax     -       -       -       -       -       ( 19,577 )     ( 19,577 ) Cash dividends paid on preferred stock ($ 0.328125 per depositary share)     -       -       -       ( 1,509 )     -       -       ( 1,509 ) Cash dividends paid on common stock ($ 0.17 per share)     -       -       -       ( 6,620 )     -       -       ( 6,620 ) Exercise of stock options ( 646 shares)     -       -       11       -       -       -       11   Net shares issued in satisfaction of deferred stock units earned ( 3,938 shares)     -       -       -       -       -       -       -   Restricted stock grants, net of forfeitures ( 2,477 shares)     -       -       -       -       -       -       -   Repurchase of treasury stock ( 316,789 shares)     -       -       -       -       ( 6,231 )     -       ( 6,231 ) Stock-based compensation expense     -       -       1,276       -       -       -       1,276                                                             Balance as of September 30, 2023   $ 110,927     $ 586,946     $ 32,027     $ 579,776     $ ( 68,108 )   $ ( 53,414 )   $ 1,188,154          Three Months Ended September 30, 2022                                               Accumulated                               Additional                     Other     Total       Preferred     Common     Paid-In     Retained     Treasury     Comprehensive     Stockholders’   (in thousands, except share data)   Stock     Stock     Capital     Earnings     Stock     (Loss) Income     Equity   Balance as of June 30, 2022   $ 110,927     $ 586,946     $ 27,536     $ 489,640     $ ( 52,799 )   $ ( 19,103 )   $ 1,143,147   Net income     -       -       -       28,915       -       -       28,915   Other comprehensive loss, net of tax     -       -       -       -       -       ( 17,389 )     ( 17,389 ) Cash dividends declared on preferred stock ($ 0.328125 per depositary share)                       ( 1,509 )                 ( 1,509 ) Cash dividends declared on common stock ($ 0.155 per share)     -       -       -       ( 6,089 )     -       -       ( 6,089 ) Stock-based compensation expense     -       -       1,220       -       -       -       1,220                                                             Balance as of September 30, 2022   $ 110,927     $ 586,946     $ 28,756     $ 510,957     $ ( 52,799 )   $ ( 36,492 )   $ 1,148,295       6 Table of Contents   (continued)       Nine Months Ended September 30, 2023                                               Accumulated                               Additional                     Other     Total       Preferred     Common     Paid-In     Retained     Treasury     Comprehensive     Stockholders’   (in thousands, except share data)   Stock     Stock     Capital     Earnings     Stock     (Loss) Income     Equity   Balance as of December 31, 2022   $ 110,927     $ 586,946     $ 30,126     $ 535,915     $ ( 52,799 )   $ ( 32,364 )   $ 1,178,751   Net income     -       -       -       67,730       -       -       67,730   Other comprehensive loss, net of tax     -       -       -       -       -       ( 21,050 )     ( 21,050 ) Cash dividends paid on preferred stock ($ 0.984375 per depositary share)     -       -       -       ( 4,527 )     -       -       ( 4,527 ) Cash dividends paid on common stock ($ 0.51 per share)     -       -       -       ( 19,342 )     -       -       ( 19,342 ) Exercise of stock options ( 7,388 shares)     -       -       96       -       -       -       96   Restricted stock grants, net of forfeitures ( 84,057 shares)     -       -       -       -       -       -       -   Stock grants ( 995 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of deferred stock units earned ( 36,006 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 52,353 shares)     -       -       -       -       -       -       -   Share redemption for tax withholdings on performance units and deferred stock units earned     -       -       ( 1,836 )     -       -       -       ( 1,836 ) Repurchase of treasury stock ( 801,952 shares)     -       -       -       -       ( 15,309 )     -       ( 15,309 ) Stock-based compensation expense     -       -       3,641       -       -       -       3,641                                                             Balance as of September 30, 2023   $ 110,927     $ 586,946     $ 32,027     $ 579,776     $ ( 68,108 )   $ ( 53,414 )   $ 1,188,154         Nine Months Ended September 30, 2022                                               Accumulated                               Additional                     Other     Total       Preferred     Common     Paid-In     Retained     Treasury     Comprehensive     Stockholders’   (in thousands, except share data)   Stock     Stock     Capital     Earnings     Stock     (Loss) Income     Equity   Balance as of December 31, 2021   $ 110,927     $ 586,946     $ 27,246     $ 440,169     $ ( 39,672 )   $ ( 1,404 )   $ 1,124,212   Net income     -       -       -       92,654       -       -       92,654   Other comprehensive loss, net of tax     -       -       -       -       -       ( 35,088 )     ( 35,088 ) Cash dividends declared on preferred stock ($ 0.984375 per depositary share)                       ( 4,527 )                 ( 4,527 ) Cash dividends declared on common stock ($ 0.44 per share)     -       -       -       ( 17,339 )     -       -       ( 17,339 ) Exercise of stock options ( 15,086 shares)     -       -       124       -       -       -       124   Restricted stock grants, net of forfeitures ( 53,169 shares)     -       -       -       -       -       -       -   Stock grants ( 153 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of restricted stock units earned ( 31,383 shares)     -       -       -       -       -       -       -   Net shares issued in satisfaction of performance units earned ( 22,350 shares)     -       -       -       -       -       -       -   Share redemption for tax withholdings on performance units and deferred stock units earned     -       -       ( 2,133 )     -       -       -       ( 2,133 ) Repurchase of treasury stock ( 447,108 shares)     -       -       -       -       ( 13,127 )     -       ( 13,127 ) Stock-based compensation expense     -       -       3,519       -       -       -       3,519                                                             Balance as of September 30, 2022   $ 110,927     $ 586,946     $ 28,756     $ 510,957     $ ( 52,799 )   $ ( 36,492 )   $ 1,148,295       See accompanying notes to unaudited consolidated financial statements.   7 Table of Contents     CONNECTONE BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)       Nine Months Ended       September 30,   (dollars in thousands)   2023     2022   Cash flows from operating activities                 Net income   $ 67,730     $ 92,654   Adjustments to reconcile net income to net cash provided by operating activities:                 Depreciation and amortization of premises and equipment     3,355       2,903   Provision for credit losses     5,500       14,450   Amortization of intangibles     1,090       1,276   Net accretion of loans     ( 1,618 )     ( 2,448 ) Accretion on bank premises     ( 37 )     ( 37 ) Accretion on deposits     ( 232 )     ( 657 ) Amortization on borrowings, net     16       27   Stock-based compensation     3,641       3,519   Losses on equity securities, net     674       1,431   Gains on sale of loans held-for-sale, net     ( 1,232 )     ( 1,519 ) Loans originated for resale     ( 19,511 )     ( 18,619 ) Proceeds from sale of loans held-for-sale     29,531       25,955   Loss on sale of other real estate owned     22       6   Increase in cash surrender value of bank owned life insurance     ( 4,681 )     ( 4,069 ) Amortization of premium and accretion of discounts on securities available-for-sale     821       1,848   Amortization of subordinated debentures issuance costs     1,058       228   Increase in accrued interest receivable     ( 733 )     ( 4,788 ) Net change in operating leases     ( 23 )     ( 142 ) Increase in other assets     ( 6,861 )     ( 4,781 ) Decrease in other liabilities     ( 13,949 )     ( 12,291 ) Net cash provided by operating activities     64,561       94,946                     Cash flows from investing activities                 Investment securities available-for-sale:                 Purchases     ( 33,454 )     ( 320,946 ) Maturities, calls and principal repayments     49,590       135,548   Purchase of equity securities     ( 2,540 )     ( 3,200 ) Net purchases of restricted investment in bank stocks     ( 2,783 )     ( 17,498 ) Cash flow hedge premium payment     -       ( 6,965 ) Payments on loans held-for-sale     25       5   Net increase in loans     ( 82,847 )     ( 1,084,483 ) Purchase of bank owned life insurance     -       ( 30,000 ) Purchases of premises and equipment     ( 3,950 )     ( 2,353 ) Proceeds from sale of OREO     242       309   Net cash used in investing activities     ( 75,717 )     ( 1,329,583 )                   Cash flows from financing activities                 Net increase in deposits     82,105       978,214   Advances of Federal Home Loan Bank (“FHLB”) borrowings     2,391,500       2,305,181   Repayments of subordinated debt     ( 75,000 )     -   Repayments of borrowings     ( 2,361,548 )     ( 1,943,448 ) Cash dividends on preferred stock     ( 4,527 )     ( 4,528 ) Cash dividends paid on common stock     ( 19,342 )     ( 17,338 ) Repurchase of treasury stock     ( 15,309 )     ( 13,127 ) Proceeds from exercise of stock options     96       124   Share redemption for tax withholdings on performance units and deferred stock units earned     ( 1,836 )     ( 2,133 ) Net cash (used by) provided by financing activities     ( 3,861 )     1,302,945   Net change in cash and cash equivalents     ( 15,017 )     68,308   Cash and cash equivalents at beginning of period     268,315       265,536                     Cash and cash equivalents at end of period   $ 253,298     $ 333,844     8 Table of Contents   (continued)   Supplemental disclosures of cash flow information                 Cash payments for:                 Interest paid on deposits and borrowings   $ 164,108     $ 34,552   Income taxes     27,377       31,426     Supplemental disclosures of noncash activities                 Investing:                 Transfer of loans held-for-investment to other real estate owned   $ -     $ 579   Transfer of loans from held-for-sale to held-for-investment     11,197       -   Transfer of loans from held-for-investment to held-for-sale     16,156       13,652   See accompanying notes to unaudited consolidated financial statements.   9 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 1a.   Nature of Operations, Principles of Consolidation and Risk and Uncertainties   Nature of Operations   ConnectOne Bancorp, Inc. (the “Parent Corporation”) is incorporated under the laws of the State of New Jersey and is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Parent Corporation’s business currently consists of the operation of its wholly-owned subsidiary, ConnectOne Bank (the “Bank” and, collectively with the Parent Corporation and the Parent Corporation’s subsidiaries, the “Company”) and making certain limited investments. The Bank’s direct and indirect subsidiaries include Union Investment Co. (a New Jersey investment company), Twin Bridge Investment Co. (a Delaware investment company), ConnectOne Preferred Funding Corp. (a New Jersey real estate investment trust), Center Financial Group, LLC (a New Jersey financial services company), Center Advertising, Inc. (a New Jersey advertising company), Morris Property Company, LLC, (a New Jersey limited liability company), Volosin Holdings, LLC, (a New Jersey limited liability company), NJCB Spec- 1, LLC (a New Jersey limited liability company), Port Jervis Holdings, LLC (a New Jersey limited liability company), BONJ Special Properties, LLC (a New Jersey limited liability company) and BoeFly, Inc. (a New Jersey financial technology company).   The Bank is a community-based, full-service New Jersey-chartered commercial bank that was founded in 2005. The Bank operates from its headquarters located at 301 Sylvan Avenue in the Borough of Englewood Cliffs, Bergen County, New Jersey and through its 24  other banking offices. Substantially all loans are secured with various types of collateral, including business assets, consumer assets and commercial/residential real estate. Each borrower’s ability to repay its loans is dependent on the conversion of assets, cash flows generated from the borrowers’ business, real estate rental and consumer wages.   Basis of Presentation and Principles of Consolidation   The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. The consolidated financial statements of the Parent Corporation are prepared on an accrual basis and include the accounts of the Parent Corporation and the Company. All significant intercompany accounts and transactions have been eliminated from the accompanying consolidated financial statements.   Segments   FASB ASC 28, “Segment Reporting,” requires companies to report certain information about operating segments. The Company is managed as one segment: a community bank. All decisions including but not limited to loan growth, deposit funding, interest rate risk, credit risk and pricing are determined after assessing the effect on the totality of the organization. For example, loan growth is dependent on the ability of the organization to fund this growth through deposits or other borrowings. As a result, the Company is managed as one operating segment.   Use of Estimates   In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated statements of condition and that affect the results of operations for the periods presented. Actual results could differ significantly from those estimates.   10 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Risks and Uncertainties   The United States economy is currently experiencing a level of price inflation not experienced since the late 1970’s and early 1980’s. It is therefore difficult to predict the response of consumers and businesses to this level of inflation, and its impact on the economy. In addition, in order to attempt to control and reduce the level of inflation, the Federal Reserve has embarked on a series of interest rate increases along with quantitative tightening to further constrict economic conditions. It is unclear whether the Federal Reserve’s efforts will be successful, and what impact they may have on the United States’ economy. It is possible that the combined effects of inflation and increases in market interest rates could cause the economy of the United States to enter a recession, which could negatively affect the businesses of our borrowers and their ability to repay their loans or need credit, which could negatively affect our results of operations.       11 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 1b. Authoritative Accounting Guidance   Adoption of New Accounting Standards in 2023   In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022 - 02, “Financial Instruments – Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022 - 02” ). ASU 2022 - 02 eliminates the accounting guidance for troubled debt restructurings (“TDRs”) in ASC 310 - 40, “Receivables - Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss (“CECL”) model introduced by ASU 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments” (ASU 2016 - 13” ). ASU 2022 - 02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326 - 20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. ASU 2022 - 02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2022 - 02 on January 1, 2023 and it did not have a material effect on the Company’s consolidated financial statements.   Newly Issued, But Not Yet Effective Accounting Standards   In June 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022 - 03, “Fair Value Measurement (Topic 820 ): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022 - 03” ). ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.  ASU 2022 - 03 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect that ASU 2022 - 03 will have on its consolidated financial statements.   12 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 2.    Earnings per Common Share   Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 260 - 10 - 45 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”). The restricted stock awards granted by the Company contain non-forfeitable rights to dividends and therefore are considered participating securities. The two -class method for calculating basic EPS excludes dividends paid to participating securities and any undistributed earnings attributable to participating securities.   Earnings per common share have been computed based on the following:       Three Months Ended     Nine Months Ended       September 30,     September 30,   (dollars in thousands, except for per share data)   2023     2022     2023     2022   Net income available to common stockholders   $ 19,898     $ 27,406     $ 63,203     $ 88,127   Earnings allocated to participating securities     ( 63 )     ( 67 )     ( 160 )     ( 217 ) Income attributable to common stock   $ 19,835     $ 27,339     $ 63,043     $ 87,910                                     Weighted average common shares outstanding, including participating securities     38,817       39,243       39,020       39,393   Weighted average participating securities     ( 123 )     ( 96 )     ( 99 )     ( 97 ) Weighted average common shares outstanding     38,694       39,147       38,921       39,296   Incremental shares from assumed conversions of options, performance units and restricted shares     135       192       135       214   Weighted average common and equivalent shares outstanding     38,829       39,339       39,056       39,510                                     Earnings per common share:                                 Basic   $ 0.51     $ 0.70     $ 1.62     $ 2.24   Diluted     0.51       0.70       1.61       2.23     There were no antidilutive share equivalents during the nine  months ended September 30, 2023  and  September 30, 2022 .   13 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 3.    Investment Securities   All of the Company’s investment securities are classified as available-for-sale as of September 30, 2023 and December 31, 2022 . Investment securities available-for-sale are reported at fair value with unrealized gains or losses included in stockholders’ equity, net of tax. Accordingly, the carrying value of such securities reflects their fair value as of September 30, 2023 and December 31, 2022 . Fair value is based upon either quoted market prices, or in certain cases where there is limited activity in the market for a particular instrument, assumptions are made to determine their fair value. See Note 6 of the Notes to Consolidated Financial Statements for further discussion.   The following tables present information related to the Company’s portfolio of securities available-for-sale as of September 30, 2023 and December 31, 2022 .                                       Allowance                                       for               Gross     Gross             Investment       Amortized     Unrealized     Unrealized     Fair     Credit       Cost     Gains     Losses     Value     Losses       (dollars in thousands)   September 30, 2023                                         Investment securities available-for-sale:                                         Federal agency obligations   $ 57,243     $ -     $ ( 13,274 )   $ 43,969     $ -   Residential mortgage pass-through securities     466,362       -       ( 76,935 )     389,427       -   Commercial mortgage pass-through securities     25,303       -       ( 5,376 )     19,927       -   Obligations of U.S. states and political subdivisions     150,218       -       ( 27,319 )     122,899       -   Corporate bonds and notes     3,000       -       ( 39 )     2,961       -   Asset-backed securities     1,354       -       ( 32 )     1,322       -   Other securities     1,362       -       -       1,362       -   Total investment securities available-for-sale   $ 704,842     $ -     $ ( 122,975 )   $ 581,867     $ -                                             December 31, 2022                                         Investment securities available-for-sale:                                         Federal agency obligations   $ 54,889     $ -     $ ( 10,439 )   $ 44,450     $ -   Residential mortgage pass-through securities     475,263       178       ( 57,863 )     417,578       -   Commercial mortgage pass-through securities     25,485       -       ( 4,381 )     21,104       -   Obligations of U.S. states and political subdivisions     157,247       111       ( 14,462 )     142,896       -   Corporate bonds and notes     7,000       -       ( 26 )     6,974       -   Asset-backed securities     1,673       -       ( 33 )     1,640       -   Other securities     242       -       -       242       -   Total investment securities available-for-sale   $ 721,799     $ 289     $ ( 87,204 )   $ 634,884     $ -     14 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 3.    Investment Securities – (continued)   Investment securities having a carrying value of approximately $ 332.5  million and $ 157.0  million as of September 30, 2023 and December 31, 2022 , respectively, were pledged to secure public deposits, borrowings, repurchase agreements, access to unutilized Federal Reserve Discount Window, Bank Term Funding Program ("BTFP") borrowings, and access to unutilized Federal Home Loan Bank advances and for other purposes required or permitted by law. As of September 30, 2023 and December 31, 2022 , there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.   The following table presents information for investments in securities available-for-sale as of September 30, 2023 , based on scheduled maturities. Actual maturities can be expected to differ from scheduled maturities due to prepayment or early call options of the issuer. Securities not due at a single maturity date are shown separately.       September 30, 2023       Amortized     Fair       Cost     Value       (dollars in thousands)   Investment securities available-for-sale:                 Due in one year or less   $ 2,000     $ 1,967   Due after one year through five years     4,389       4,331   Due after five years through ten years     1,856       1,783   Due after ten years     203,570       163,070   Residential mortgage pass-through securities     466,362       389,427   Commercial mortgage pass-through securities     25,303       19,927   Other securities     1,362       1,362   Total investment securities available-for-sale   $ 704,842     $ 581,867     There were  no  realized gains or losses on securities during the nine  months ended September 30, 2023  and September 30, 2022 .   15 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 3.    Investment Securities – (continued)   Impairment Analysis of Available-for-Sale Debt Securities   The following tables indicate securities in an unrealized loss position for which an allowance for credit losses (“ACL”) has not been recorded, aggregated by investment category and by the length of continuous time individual securities have been in an unrealized loss position as of September 30, 2023 and December 31, 2022 .       September 30, 2023       Total     Less than 12 Months     12 Months or Longer       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized       Value     Losses     Value     Losses     Value     Losses       (dollars in thousands)   Investment securities available-for-sale:                                                 Federal agency obligations   $ 43,969     $ ( 13,274 )   $ 6,056     $ ( 194 )   $ 37,913     $ ( 13,080 ) Residential mortgage pass-through securities     389,427       ( 76,935 )     28,555       ( 858 )     360,872       ( 76,077 ) Commercial mortgage pass-through securities     19,927       ( 5,376 )     -       -       19,927       ( 5,376 ) Obligations of U.S. states and political subdivisions     122,899       ( 27,319 )     22,739       ( 1,825 )     100,160       ( 25,494 ) Corporate bonds and notes     2,961       ( 39 )     994       ( 6 )     1,967       ( 33 ) Asset-backed securities     1,322       ( 32 )     -       -       1,322       ( 32 ) Total temporarily impaired securities   $ 580,505     $ ( 122,975 )   $ 58,344     $ ( 2,883 )   $ 522,161     $ ( 120,092 )       December 31, 2022       Total     Less than 12 Months     12 Months or Longer       Fair     Unrealized     Fair     Unrealized     Fair     Unrealized       Value     Losses     Value     Losses     Value     Losses       (dollars in thousands)   Investment securities available-for-sale:                                                 Federal agency obligations   $ 44,451     $ ( 10,439 )   $ 20,517     $ ( 1,831 )   $ 23,934     $ ( 8,608 ) Residential mortgage pass-through securities     403,039       ( 57,863 )     218,918       ( 13,869 )     184,121       ( 43,994 ) Commercial mortgage pass-through securities     21,105       ( 4,381 )     14,523       ( 2,304 )     6,582       ( 2,077 ) Obligations of U.S. states and political subdivisions     133,265       ( 14,462 )     47,446       ( 3,404 )     85,819       ( 11,058 ) Corporate bonds and notes     4,973       ( 26 )     4,973       ( 26 )     -       -   Asset-backed securities     1,640       ( 33 )     1,048       ( 16 )     592       ( 17 ) Total temporarily impaired securities   $ 608,473     $ ( 87,204 )   $ 307,425     $ ( 21,450 )   $ 301,048     $ ( 65,754 )   16 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 3.    Investment Securities – (continued)   The Company has elected to exclude accrued interest from the amortized cost of its investment securities available-for-sale. Accrued interest receivable for investment securities available-for-sale as of September 30, 2023 and December 31, 2022 , totaled $ 2.1  million and $ 2.4  million, respectively.   The Company evaluates securities in an unrealized loss position for impairment related to credit losses on at least a quarterly basis. Securities in unrealized loss positions are first assessed as to whether we intend to sell, or if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If one of the criteria is met, the security’s amortized cost basis is written down to fair value through current earnings. For securities that do not meet these criteria, the Company evaluates whether the decline in fair value resulted from credit losses or other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Unrealized losses on asset backed securities and state and municipal securities have not been recognized into income because the issuers are of high credit quality and we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery. The decline in fair value is largely due to changes in interest rates and other market conditions. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was recorded as of September  30, 2023.   Federal agency obligations, residential mortgage-backed pass-through securities and commercial mortgage-backed pass-through securities are issued by U.S. Government agencies and U.S. Government sponsored enterprises. Although a government guarantee exists on these investments, these entities are not legally backed by the full faith and credit of the federal government, and the current support they receive is subject to a cap as part of the agreement entered into in 2008. Nonetheless, at this time we do not foresee any set of circumstances in which the government would not fund its commitments on these investments as the issuers are an integral part of the U.S. housing market in providing liquidity and stability. Therefore, we concluded that a zero -allowance approach for these investment securities is appropriate.     Note 4. Derivatives   As part of our overall asset liability management strategy the Company uses derivative instruments, which can include interest rate swaps, collars, caps, and floors.  The notional amount does not represent amounts exchanged by the parties.  The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements. Derivative instruments are recognized on the balance sheet at their fair value and are not reported on a net basis.   Derivatives Designated as Hedges   Subsequent changes in fair value for a hedging instrument that has been designated and qualifies as part of a hedging relationship are accounted for in the following manner:   1 ) Cash flow hedges: changes in fair value are recognized as a component in other comprehensive income 2 ) Fair value hedges: changes in fair value are recognized concurrently in earnings   As long as a hedging instrument is designated and the results of the effectiveness testing support that the instrument qualifies for hedge accounting treatment, 100% of the periodic changes in fair value of the hedging instrument are accounted for as outlined above. This is the case whether or not economic mismatches exist in the hedging relationship. As a result, there is no periodic measurement or recognition of ineffectiveness. Rather, the full impact of hedge gains and losses is recognized in the period in which the hedged transactions impact earnings. The change in fair value of the hedging instrument that is included in the assessment of hedge effectiveness is presented in the same income statement line item that is used to present the earnings effect of the hedged item.   17 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 4. Derivatives – (continued)   Cash Flow Hedges   The Company entered into eleven pay fixed-rate interest rate swaps, with a total notional amount of $ 500  million, all of which were entered into in 2021 and 2022.  These are designated as cash flow hedges of current, Federal Home Loan Bank advances. We are required to pay fixed rates of interest ranging from 0.63 % to 3.41 % and receive variable rates of interest that reset quarterly based on the daily compounding secured overnight financing rate (“SOFR”).  The eleven  swaps carry expiration dates ranging from December 2025  to March 2028.  The swaps are determined to be fully effective during the period presented and therefore no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company expects the hedges to remain fully effective during the remaining term of the swaps.      The Company previously entered into two  forward starting interest rate cap spread transactions, one with a total notional amount of $ 150  million, which became effective on October 1, 2022 and matures in October of 2027 and one interest rate cap spread transaction, with a total notional amount of $ 75 million, which became effective in November 2022 and matures in November of 2027.  These are designated as cash flow hedges of brokered certificates of deposits, and the interest rate cap spread is indexed to a benchmark of fed funds with payment required on a monthly basis. The structure of these instruments is such that the Company entered into a total of  $225 million in notional amount of sold interest rate cap agreements, in which we are required to pay the counterparty an incremental amount if the index rate exceeds a set cap rate. Simultaneously, the Company purchased a total of $ 225 million notional amount of interest rate cap agreements in which we receive an incremental amount if the index rate is above a set cap rate.   No payments are required if the index rate is at, or below, the cap rate on the sold or purchased interest rate cap agreements.     Net interest income recorded on these swap and interest rate cap transactions totaled approximately $ 5.5  million and $ 14.6  million during the three and nine months ended September 30, 2023 , respectively, compared to $ 1.2  million and $ 0.5  million for the three and nine  months ended September  30, 2022, respectively, and is recorded as a component of either interest expense on Federal Home Loan Bank advances or brokered certificates of deposits.   18 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 4. Derivatives – (continued)   The following table presents the net gains (losses) recorded in other comprehensive income and the Consolidated Statements of Income relating to the cash flow hedge derivative instruments for the periods indicated:           Nine Months Ended September 30, 2023       Amount of gain (loss) recognized in OCI (Effective Portion)     Amount of (gain) loss reclassified from OCI to interest expense     Amount of gain recognized in other Noninterest income (Ineffective Portion)       (dollars in thousands)   Interest rate contracts   $ 19,832     $ ( 13,013 )   $ -         Nine Months Ended September 30, 2022       Amount of gain (loss) recognized in OCI (Effective Portion)     Amount of (gain) loss reclassified from OCI to interest expense     Amount of gain recognized in other Noninterest income (Ineffective Portion)       (dollars in thousands)   Interest rate contracts   $ 44,253     $ ( 524 )   $ -     The following table reflects the cash flow hedges included in the consolidated statements of condition as of September 30, 2023 and December 31, 2022 :       September 30, 2023     December 31, 2022       Notional Amount     Fair Value     Notional Amount     Fair Value               (dollars in thousands)           Interest rate contracts   $ 950,000     $ 61,972     $ 950,000     $ 56,797     19 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 5. Loans and the Allowance for Credit Losses   Loans Receivable – The following table sets forth the composition of the Company’s loan portfolio segments, including net deferred loan fees, as of September 30, 2023 and December 31, 2022 :       September 30, 2023     December 31, 2022       (dollars in thousands)   Commercial   $ 1,475,571     $ 1,472,734   Commercial real estate     5,837,539       5,795,228   Commercial construction     622,748       574,139   Residential real estate     251,416       264,748   Consumer     936       2,312   Gross loans     8,188,210       8,109,161   Net deferred loan fees     ( 7,101 )     ( 9,472 ) Total loans receivable   $ 8,181,109     $ 8,099,689     As of  September 30, 2023  and December 31, 2022 , loans totaling approximately $ 5.7  billion and $ 2.7  billion, respectively, were pledged to secure borrowings from the FHLB of New York and the Federal Reserve Bank of New York.    Loans held-for-sale - The following table sets forth the composition of the Company’s loans held-for-sale as of September 30, 2023 and December 31, 2022 :       September 30, 2023     December 31, 2022       (dollars in thousands)   Commercial real estate   $ -     $ 13,473   Residential real estate     -       299   Total carrying amount   $ -     $ 13,772     Loans Receivable on Nonaccrual Status - The following tables present nonaccrual loans with an ACL and nonaccrual loans without an ACL as of September 30, 2023 and December 31, 2022 :       September 30, 2023       Nonaccrual loans with ACL     Nonaccrual loans without ACL     Total nonaccrual loans       (dollars in thousands)   Commercial   $ 21,604     $ 555     $ 22,159   Commercial real estate     70       29,754       29,824   Residential real estate     806       3,270       4,076   Total   $ 22,480     $ 33,579     $ 56,059     20 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)       December 31, 2022       Nonaccrual loans with ACL     Nonaccrual loans without ACL     Total nonaccrual loans       (dollars in thousands)   Commercial   $ 23,512     $ 1,745     $ 25,257   Commercial real estate     10,220       6,597       16,817   Residential real estate     604       1,776       2,380   Total   $ 34,336     $ 10,118     $ 44,454     Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated and individually evaluated.   Credit Quality Indicators - The Company continuously monitors the credit quality of its loans receivable. In addition to its internal monitoring, the Company utilizes the services of a third -party loan review firm to periodically validate the credit quality of its loans receivable on a sample basis. Credit quality is monitored by reviewing certain credit quality indicators. Assets classified “Pass” are deemed to possess average to superior credit quality, requiring no more than normal attention. Assets classified as “Special Mention” have generally acceptable credit quality yet possess higher risk characteristics/circumstances than satisfactory assets. Such conditions include strained liquidity, slow pay, stale financial statements, or other conditions that require more stringent attention from the lending staff. These conditions, if not corrected, may weaken the credit quality or inadequately protect the Company’s credit position at some future date. Assets are classified “Substandard” if the asset has a well-defined weakness that requires management’s attention to a greater degree than for loans classified special mention. Such weakness, if left uncorrected, could possibly result in the compromised ability of the loan to perform to contractual requirements. An asset is classified as “Doubtful” if it is inadequately protected by the net worth and/or paying capacity of the obligor or of the collateral, if any, that secures the obligation. Assets classified as doubtful include assets for which there is a “distinct possibility” that a degree of loss will occur if the inadequacies are not corrected.   21 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   We evaluate whether a modification, extension or renewal of a loan is a current period origination in accordance with GAAP. Generally, loans up for renewal are subject to a full credit evaluation before the renewal is granted and such loans are considered current period originations for purpose of the table below. The following table presents loans by origination and risk designation as of September 30, 2023 (dollars in thousands):       Term loans amortized cost basis by origination year                   2023     2022     2021     2020     2019     Prior     Revolving Loans     Total Gross Loans   Commercial                                                                 Pass   $ 146,241     $ 259,603     $ 271,580     $ 41,459     $ 13,749     $ 119,592     $ 590,667     $ 1,442,891   Special mention     -       337       86       -       567       3,445       3,989       8,424   Substandard     304       1,316       163       4       1,551       19,559       1,359       24,256   Doubtful     -       -       -       -       -       -       -       -   Total Commercial   $ 146,545     $ 261,256     $ 271,829     $ 41,463     $ 15,867     $ 142,596     $ 596,015     $ 1,475,571                                                                     Commercial Real Estate                                                                 Pass   $ 170,541     $ 1,572,880     $ 1,581,212     $ 356,251     $ 355,665     $ 1,269,678     $ 462,573     $ 5,768,800   Special mention     -       -       -       -       -       26,421       -       26,421   Substandard     -       -       1,899       -       2,625       20,964       16,830       42,318   Doubtful     -       -       -       -       -       -       -       -   Total Commercial Real Estate   $ 170,541     $ 1,572,880     $ 1,583,111     $ 356,251     $ 358,290     $ 1,317,063     $ 479,403     $ 5,837,539                                                                     Commercial Construction                                                                 Pass   $ 582     $ 5,693     $ 15,682     $ 6,236     $ -     $ -     $ 585,855     $ 614,048   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       8,700       8,700   Doubtful     -       -       -       -       -       -       -       -   Total Commercial Construction   $ 582     $ 5,693     $ 15,682     $ 6,236     $ -     $ -     $ 594,555     $ 622,748                                                                     Residential                                                                 Pass   $ 8,009     $ 43,048     $ 23,247     $ 21,863     $ 20,059     $ 92,966     $ 34,663     $ 243,855   Special mention     -       -       -       -       -       655       2,830       3,485   Substandard     -       -       563       438       -       2,520       555       4,076   Doubtful     -       -       -       -       -       -       -       -   Total Residential Real Estate   $ 8,009     $ 43,048     $ 23,810     $ 22,301     $ 20,059     $ 96,141     $ 38,048     $ 251,416                                                                     Consumer                                                                 Pass   $ 747     $ 96     $ -     $ 6     $ -     $ -     $ 87     $ 936   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 747     $ 96     $ -     $ 6     $ -     $ -     $ 87     $ 936                                                                     Total                                                                 Pass   $ 326,120     $ 1,881,320     $ 1,891,721     $ 425,815     $ 389,473     $ 1,482,236     $ 1,673,845     $ 8,070,530   Special mention     -       337       86       -       567       30,521       6,819       38,330   Substandard     304       1,316       2,625       442       4,176       43,043       27,444       79,350   Doubtful     -       -       -       -       -       -       -       -   Grand Total   $ 326,424     $ 1,882,973     $ 1,894,432     $ 426,257     $ 394,216     $ 1,555,800     $ 1,708,108     $ 8,188,210     22 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   The following table presents loans by origination and risk designation as of December 31, 2022 (dollars in thousands):       Term loans amortized cost basis by origination year                   2022     2021     2020     2019     2018     Prior     Revolving Loans     Total Gross Loans   Commercial                                                                 Pass   $ 301,636     $ 305,721     $ 47,952     $ 28,177     $ 52,950     $ 127,739     $ 550,483     $ 1,414,658   Special mention     -       -       -       583       26       8,551       3,292       12,452   Substandard     7,615       146       15       1,769       11,214       22,596       2,269       45,624   Doubtful     -       -       -       -       -       -       -       -   Total Commercial   $ 309,251     $ 305,867     $ 47,967     $ 30,529     $ 64,190     $ 158,886     $ 556,044     $ 1,472,734                                                                     Commercial Real Estate                                                                 Pass   $ 1,571,751     $ 1,608,023     $ 382,987     $ 358,578     $ 375,886     $ 987,982     $ 401,365     $ 5,686,572   Special mention     3,040       -       -       -       -       37,774       8,839       49,653   Substandard     -       1,929       -       6,526       19,138       23,287       8,123       59,003   Doubtful     -       -       -       -       -       -       -       -   Total Commercial Real Estate   $ 1,574,791     $ 1,609,952     $ 382,987     $ 365,104     $ 395,024     $ 1,049,043     $ 418,327     $ 5,795,228                                                                     Commercial Construction                                                                 Pass   $ 8,615     $ 7,605     $ 6,720     $ 508     $ -     $ -     $ 542,460     $ 565,908   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       8,231       8,231   Doubtful     -       -       -       -       -       -       -       -   Total Commercial Construction   $ 8,615     $ 7,605     $ 6,720     $ 508     $ -     $ -     $ 550,691     $ 574,139                                                                     Residential Real Estate                                                                 Pass   $ 45,926     $ 25,318     $ 24,409     $ 21,557     $ 20,284     $ 78,314     $ 41,468     $ 257,276   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       3,379       4,093       7,472   Doubtful     -       -       -       -       -       -       -       -   Total Residential Real Estate   $ 45,926     $ 25,318     $ 24,409     $ 21,557     $ 20,284     $ 81,693     $ 45,561     $ 264,748                                                                     Consumer                                                                 Pass   $ 2,219     $ -     $ 9     $ -     $ -     $ 2     $ 82     $ 2,312   Special mention     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 2,219     $ -     $ 9     $ -     $ -     $ 2     $ 82     $ 2,312                                                                     Total                                                                 Pass   $ 1,930,147     $ 1,946,667     $ 462,077     $ 408,820     $ 449,120     $ 1,194,037     $ 1,535,858     $ 7,926,726   Special mention     3,040       -       -       583       26       46,325       12,131       62,105   Substandard     7,615       2,075       15       8,295       30,352       49,262       22,716       120,330   Doubtful     -       -       -       -       -       -       -       -   Grand Total   $ 1,940,802     $ 1,948,742     $ 462,092     $ 417,698     $ 479,498     $ 1,289,624     $ 1,570,705     $ 8,109,161        23 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   Collateral Dependent Loans : Loans which meet certain criteria are individually evaluated as part of the process of calculating the allowance for credit losses. The evaluation is determined on an individual basis using the fair value of the collateral as of the reporting date. The following table presents collateral dependent loans that were individually evaluated for impairment as of September 30, 2023 and December 31, 2022 :       September 30, 2023       Real Estate     Other     Total       (dollars in thousands)   Commercial   $ 4,891     $ 14,719     $ 19,610   Commercial real estate     41,636       -       41,636   Commercial construction     8,700       -       8,700   Residential real estate     6,755       -       6,755   Total   $ 61,982     $ 14,719     $ 76,701         December 31, 2022       Real Estate     Other     Total       (dollars in thousands)   Commercial   $ 5,352     $ 22,517     $ 27,869   Commercial real estate     52,477       -       52,477   Commercial construction     8,232       -       8,232   Residential real estate     5,864       -       5,864   Total   $ 71,925     $ 22,517     $ 94,442     Aging   Analysis - The following table provides an analysis of the aging of the loans by class, excluding the effect of net deferred fees, which are past due as of September 30, 2023 and December 31, 2022:        September 30, 2023       30-59 Days Past Due     60-89 Days Past Due     90 Days or Greater Past Due and Still Accruing     Nonaccrual     Total Past Due and Nonaccrual     Current     Gross Loans       (dollars in thousands)   Commercial   $ 433     $ 1,979     $ -     $ 22,159     $ 24,571     $ 1,451,000     $ 1,475,571   Commercial real estate     -       597       -       29,824       30,421       5,807,118       5,837,539   Commercial construction     -       -       -       -       -       622,748       622,748   Residential real estate     227       -       -       4,076       4,303       247,113       251,416   Consumer     -       254       -       -       254       682       936   Total   $ 660     $ 2,830     $ -     $ 56,059     $ 59,549     $ 8,128,661     $ 8,188,210         December 31, 2022       30-59 Days Past Due     60-89 Days Past Due     90 Days or Greater Past Due and Still Accruing     Nonaccrual     Total Past Due and Nonaccrual     Current     Gross Loans       (dollars in thousands)   Commercial   $ 306     $ -     $ -     $ 25,257     $ 25,563     $ 1,447,171     $ 1,472,734   Commercial real estate     90       -       5,591       16,817       22,498       5,772,730       5,795,228   Commercial construction     -       -       -       -       -       574,139       574,139   Residential real estate     1,569       -       -       2,380       3,949       260,799       264,748   Consumer     -       -       -       -       -       2,312       2,312   Total   $ 1,965     $ -     $ 5,591     $ 44,454     $ 52,010     $ 8,057,151     $ 8,109,161     24 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   The following tables detail, at the period-end presented, the amount of gross loans (excluding loans held-for-sale) that are evaluated individually, and collectively, for impairment, those acquired with deteriorated quality, and the related portion of the allowance for credit losses that are allocated to each loan portfolio segment:       September 30, 2023       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Total       (dollars in thousands)   Allowance for credit losses - loans                                                 Individually evaluated impairment   $ 7,685     $ 661     $ -     $ -     $ -     $ 8,346   Collectively evaluated impairment     19,433       52,072       3,909       3,732       5       79,151   Acquired with deteriorated credit quality individually analyzed     733       -       -       -       -       733   Total   $ 27,851     $ 52,733     $ 3,909     $ 3,732     $ 5     $ 88,230                                                     Gross loans                                                 Individually evaluated impairment   $ 24,676     $ 41,636     $ 8,700     $ 6,755     $ -     $ 81,767   Collectively evaluated impairment     1,450,405       5,795,903       614,048       244,661       936       8,105,953   Acquired with deteriorated credit quality individually analyzed     490       -       -       -       -       490   Total   $ 1,475,571     $ 5,837,539     $ 622,748     $ 251,416     $ 936     $ 8,188,210         December 31, 2022       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Total       (dollars in thousands)   Allowance for credit losses - loans                                                 Individually evaluated impairment   $ 7,426     $ 1,003     $ -     $ 50     $ -     $ 8,479   Collectively evaluated impairment     19,319       50,818       3,718       4,093       7       77,955   Acquired with deteriorated credit quality individually analyzed     2,158       1,921       -       -       -       4,079   Total   $ 28,903     $ 53,742     $ 3,718     $ 4,143     $ 7     $ 90,513                                                     Gross loans                                                 Individually evaluated impairment   $ 30,994     $ 46,886     $ 8,232     $ 5,864     $ -     $ 91,976   Collectively evaluated impairment     1,436,866       5,742,751       565,907       258,884       2,312       8,006,720   Acquired with deteriorated credit quality individually analyzed     4,874       5,591       -       -       -       10,465   Total   $ 1,472,734     $ 5,795,228     $ 574,139     $ 264,748     $ 2,312     $ 8,109,161     25 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   Activity in the Company’s ACL for loans for the three and nine months ended September 30, 2023 is summarized in the tables below.       Three Months Ended September 30, 2023       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Total       (dollars in thousands)   Balance as of June 30, 2023   $ 29,326     $ 52,509     $ 3,546     $ 3,819     $ 5     $ 89,205   Charge-offs     ( 2,250 )     ( 237 )     -       -       -       ( 2,487 ) Recoveries     -       -       -       1       7       8   Provision for (reversal of) credit losses - loans     775       461       363       ( 88 )     ( 7 )     1,504                                                     Balance as of September 30, 2023   $ 27,851     $ 52,733     $ 3,909     $ 3,732     $ 5     $ 88,230         Nine Months Ended September 30, 2023       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Total       (dollars in thousands)   Balance as of December 31, 2022   $ 28,903     $ 53,742     $ 3,718     $ 4,143     $ 7     $ 90,513   Charge-offs     ( 6,117 )     ( 1,954 )     -       ( 18 )     -       ( 8,089 ) Recoveries     9       -       -       69       7       85   Provision for (reversal of) credit losses - loans     5,056       945       191       ( 462 )     ( 9 )     5,721                                                     Balance as of September 30, 2023   $ 27,851     $ 52,733     $ 3,909     $ 3,732     $ 5     $ 88,230         Three Months Ended September 30, 2022       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Total       (dollars in thousands)   Balance as of June 30, 2022   $ 28,135     $ 47,562     $ 3,413     $ 3,625     $ 4     $ 82,739   Charge-offs     ( 410 )     -       -       -       ( 3 )     ( 413 ) Recoveries     53       -       -       -       -       53   Provision for credit losses - loans     1,911       6,964       31       428       4       9,338                                                     Balance as of September 30, 2022   $ 29,689     $ 54,526     $ 3,444     $ 4,053     $ 5     $ 91,717         Nine Months Ended September 30, 2022       Commercial     Commercial real estate     Commercial construction     Residential real estate     Consumer     Total       (dollars in thousands)   Balance as of December 31, 2021   $ 25,969     $ 45,589     $ 3,580     $ 3,628     $ 7     $ 78,773   Charge-offs     ( 751 )     ( 226 )     -       ( 9 )     ( 3 )     ( 989 ) Recoveries     54       -       -       63       -       117   Provision for (reversal of) credit losses - loans     4,417       9,163       ( 136 )     371       1       13,816                                                     Balance as of September 30, 2022   $ 29,689     $ 54,526     $ 3,444     $ 4,053     $ 5     $ 91,717     26 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   Loan Modifications to Borrowers Experiencing Financial Difficulty:   The Company adopted Accounting Standards Update (“ASU”) 2022 - 02, Financial Instruments - Credit Losses (Topic 326 ) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022 - 02” ) effective January 1, 2023. The amendments in ASU 2022 - 02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.   The following table presents the amortized cost basis at the end of the reporting period of the loan modifications to borrowers experiencing financial difficulty:       Nine Months Ended       September 30, 2023       Term Extension     % of Portfolio       (dollars in thousands)   Commercial   $ 44       0.00 % Commercial real estate     211       0.00 %   The above table consists of loans that added a weighted average of 13  years to the maturity of the modified loans, which did not have a material effect on the cash flows.    The following table presents the performance of loans that have been modified in the last twelve months:       September 30, 2023       Current     Past Due 30-89 Days     Past Due 90 Days or More       (dollars in thousands)   Commercial   $ 44     $ -     $ -   Commercial real estate     211       -       -     There were no loans to borrowers experiencing financial difficulty that had a payment default during the nine months ended September  30, 2023 and which were modified in the twelve months prior to that default. Default is determined at 90 or more days past due, upon charge-off, or upon foreclosure. Modified loans in default are individually evaluated for the allowance for credit losses or if the modified loan is deemed uncollectible, the loan, or a portion of the loan, is written off and the allowance for credit losses is adjusted accordingly.   Troubled debt restructurings:   Information on loan modifications prior to the adoption of ASU 2022 - 02 on January 1, 2023 is presented in accordance with the applicable accounting standards in effect at that time. During the nine  months ended September  30, 2022, the Company modified five  loans with maturity extensions and one loan interest rate reduction. The one loan that was an interest rate reduction was a commercial real estate loan that included a one -time $ 500,000  principal paydown.      27 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)       Allowance for Credit Losses for Unfunded Commitments   The Company has recorded an ACL for unfunded credit commitments, which was recorded in other liabilities. The provision is recorded within the provision for (reversal of) credit losses on the Company’s income statement. The following table presents a roll forward of the allowance for credit losses for unfunded commitments for the  three and nine months ended September 30, 2023 and 2022 :       Three Months Ended     Three Months Ended       September 30,     September 30,       2023     2022       (dollars in thousands)   Balance at beginning of period   $ 2,819     $ 2,324   (Reversal of) provision for credit losses - unfunded commitments     ( 4 )     662   Balance at end of period   $ 2,815     $ 2,986         Nine Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022       (dollars in thousands)   Balance at beginning of period   $ 3,036     $ 2,352   (Reversal of) provision for credit losses - unfunded commitments     ( 221 )     634   Balance at end of period   $ 2,815     $ 2,986     28 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 5. Loans and the Allowance for Credit Losses – (continued)   Components of (Reversal of) Provision for Credit Losses   The following table summarizes the provision for (reversal of) credit losses for the  three and nine months ended September 30, 2023 and 2022 :       Three Months Ended     Three Months Ended       September 30,     September 30,       2023     2022       (dollars in thousands)   Provision for credit losses – loans   $ 1,504     $ 9,338   (Reversal of) provision for credit losses - unfunded commitments     ( 4 )     662   Provision for credit losses   $ 1,500     $ 10,000         Nine Months Ended     Nine Months Ended       September 30,     September 30,       2023     2022       (dollars in thousands)   Provision for credit losses – loans   $ 5,721     $ 13,816   (Reversal of) provision for credit losses - unfunded commitments     ( 221 )     634   Provision for credit losses   $ 5,500     $ 14,450       Note 6. Fair Value Measurements and Fair Value of Financial Instruments   Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.     Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.     Level 2: Quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.     Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (for example, supported with little or no market activity).   An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.   29 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments – (continued)   Assets and Liabilities Measured at Fair Value on a Recurring Basis   The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 :   Investment Securities Available-for-Sale and Equity Securities : Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 inputs include securities that have quoted prices in active markets for identical assets. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of instruments which would generally be classified within Level 2 of the valuation hierarchy include municipal bonds and certain agency collateralized mortgage obligations. In certain cases where there is limited activity in the market for a particular instrument, assumptions must be made to determine the fair value of the instruments and these are classified as Level 3. When measuring fair value, the valuation techniques available under the market approach, income approach and/or cost approach are used. The Company’s evaluations are based on market data and the Company employs combinations of these approaches for its valuation methods depending on the asset class.   Derivatives : The fair value of derivatives is based on valuation models using observable market data as of the measurement date (level 2 ). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rate, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third -party pricing services.   For financial assets and liabilities measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used as of September 30, 2023 and December 31, 2022 are as follows:               September 30, 2023               Fair Value Measurements at Reporting Date Using       Total Fair Value     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   (dollars in thousands)                                 Recurring fair value measurements: Assets                                 Investment securities:                                 Available-for-sale:                                 Federal agency obligations   $ 43,969     $ -     $ 43,969     $ -   Residential mortgage pass-through securities     389,427       -       389,427       -   Commercial mortgage pass-through securities     19,927       -       19,927       -   Obligations of U.S. states and political subdivision     122,899       -       115,882       7,017   Corporate bonds and notes     2,961       -       2,961       -   Asset-backed securities     1,322       -       1,322       -   Other securities     1,362       1,362       -       -   Total available-for-sale     581,867       1,362       573,488       7,017                                     Equity securities     17,677       9,394       8,283       -   Derivatives     61,972       -       61,972       -   Total assets   $ 661,516     $ 10,756     $ 643,743     $ 7,017     30 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)               December 31, 2022               Fair Value Measurements at Reporting Date Using       Total Fair Value     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   (dollars in thousands)                                 Recurring fair value measurements: Assets                                 Investment securities:                                 Available-for-sale:                                 Federal agency obligations   $ 44,450     $ -     $ 44,450     $ -   Residential mortgage pass- through securities     417,578       -       417,578       -   Commercial mortgage pass-through securities     21,104       -       21,104       -   Obligations of U.S. states and political subdivision     142,896       -       135,547       7,349   Corporate bonds and notes     6,974       -       6,974       -   Asset-backed securities     1,640       -       1,640       -   Other securities     242       242       -       -   Total available-for-sale   $ 634,884     $ 242     $ 627,293     $ 7,349                                     Equity securities     15,811       9,733       6,078       -   Derivatives     56,797       -       56,797       -   Total assets   $ 707,492     $ 9,975     $ 690,168     $ 7,349     There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2023 and during the year ended December 31, 2022 .   Assets Measured at Fair Value on a Nonrecurring Basis   The Company may be required periodically to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or impairment write-downs of individual assets. The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis as of September 30, 2023 and December 31, 2022 .   Loans Held-for-Sale : Residential mortgage loans, originated and intended for sale in the secondary market, are carried at the lower of aggregate cost or estimated fair value as determined by outstanding commitments from investors. For these loans originated and intended for sale, gains and losses on loan sales (sale proceeds minus carrying value) are recorded in other income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in other income upon sale of the loan. Management obtains quotes or bids on all or parts of these loans directly from the purchasing financial institutions (Level 2 ).   Other loans held-for-sale are carried at the lower of aggregate cost or estimated fair value. Fair value of these loans is determined based on the terms of the loan, such as interest rate, maturity date, reset term, as well as sales of similar assets (Level 3 ).   31 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)   Collateral Dependent Loans : The Company may record adjustments to the carrying value of loans based on fair value measurements, generally as partial charge-offs of the uncollectible portions of these loans. These adjustments also include certain impairment amounts for collateral dependent loans calculated in accordance with GAAP. Impairment amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated impairment amount applicable to that loan does not necessarily represent the fair value of the loan. Real estate collateral is valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable by market participants. However, due to the substantial judgment applied and limited volume of activity as compared to other assets, fair value is based on Level 3 inputs. Estimates of fair value used for collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and are also based on Level 3 inputs.   For assets measured at fair value on a nonrecurring basis, the fair value measurements as of September 30, 2023 and December 31, 2022 are as follows:               Fair Value Measurements at Reporting Date Using   Assets measured at fair value on a nonrecurring basis:   September 30, 2023     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Collateral dependent loans:   (dollars in thousands)   Commercial   $ 10,659     $ -     $ -     $ 10,659   Commercial real estate     7,330       -       -       7,330                                                   Fair Value Measurements at Reporting Date Using   Assets measured at fair value on a nonrecurring basis:   December 31, 2022     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Collateral dependent loans:   (dollars in thousands)   Commercial   $ 14,550     $ -     $ -     $ 14,550   Commercial real estate     17,264       -       -       17,264   Residential real estate     1,392       -       -       1,392     Collateral dependent loans – Collateral dependent loans as of September 30, 2023 that required a valuation allowance were $ 23.8  million with a related valuation allowance of $ 5.8  million compared to $ 43.8  million with a related valuation allowance of $ 10.5  million as of December 31, 2022 .   32 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)   Assets Measured with Significant Unobservable Level 3 Inputs   Recurring basis   The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3 ) for the nine months ended September 30, 2023 and for the year ended December  31, 2022:       Municipal Securities       (dollars in thousands)   Beginning balance, December 31, 2022   $ 7,349   Principal paydowns     ( 221 ) Change in unrealized gain     ( 111 ) Ending balance, September 30, 2023   $ 7,017          Municipal Securities       (dollars in thousands)   Beginning balance, December 31, 2021   $ 8,565   Principal paydowns     ( 287 ) Changes in unrealized loss     ( 929 ) Ending balance, December 31, 2022   $ 7,349     The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 . The table below provides quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy.   September 30, 2023                           Fair Value   Valuation Techniques   Unobservable Input   Rate   Securities available-for-sale:         (dollars in thousands)             Municipal securities   $ 7,017   Discounted cash flows   Discount rate     4.4 %   December 31, 2022                           Fair Value   Valuation Techniques   Unobservable Input   Rate   Securities available-for-sale:         (dollars in thousands)             Municipal securities   $ 7,349   Discounted cash flows   Discount rate     4.3 %   33 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)   Nonrecurring basis : The following methods and assumptions were used to estimate the fair values of the Company’s assets measured at fair value on a nonrecurring basis for the periods presented. The tables below provide quantitative information about significant unobservable inputs used in fair value measurements within Level 3 hierarchy of collateral dependent loans.   September 30, 2023                       (dollars in thousands)   Fair Value     Valuation Techniques Unobservable Input   Range (weighted average)   Commercial   $ 10,205     Market approach (100%) Average transfer price as a price to unpaid principal balance     65% –92% (68%)   Commercial     454     Appraisals of collateral value Adjustment for comparable sales   -7.5% to +25% (+0.1%)   Commercial real estate     7,330     Appraisals of collateral value Adjustment for comparable sales     -15% to +5% (+4%)     December 31, 2022                       (dollars in thousands)   Fair Value     Valuation Techniques Unobservable Input   Range (weighted average)   Commercial loans   $ 14,028     Market approach (100%) Average transfer price as a price to unpaid principal balance     65% to 96% (67%)   Commercial loans     522     Appraisals of collateral value Adjustment for comparable sales   -10% to +13% (+3%)   Commercial real estate loans     17,264     Appraisals of collateral value Adjustment for comparable sales   -20% to +0% (-15%)   Residential real estate loans     1,392     Appraisals of collateral value Adjustment for comparable sales   +21% to +39% (22%)     34 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)   As of September 30, 2023 the fair value measurements presented are consistent with Topic 820, Fair Value Measurement , in which fair value represents exit price. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2023 and December 31, 2022 :                        Fair Value Measurements       Carrying Amount     Fair Value     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)       (dollars in thousands)                                             September 30, 2023                                         Financial assets:                                         Cash and due from banks   $ 253,298     $ 253,298     $ 253,298     $ -     $ -   Securities available-for-sale     581,867       581,867       1,362       573,488       7,017   Restricted investments in bank stocks     49,387       n/a       n/a       n/a       n/a   Equity securities     17,677       17,677       9,394       8,283       -   Net loans     8,092,879       7,725,439       -       -       7,725,439   Derivatives - interest rate contracts     61,972       61,972       -       61,972       -   Accrued interest receivable     46,795       46,795       -       5,160       41,635                                             Financial liabilities:                                         Noninterest-bearing deposits     1,224,125       1,224,125       1,224,125       -       -   Interest-bearing deposits     6,214,370       6,181,082       3,692,159       2,488,923       -   Borrowings     887,590       884,745       -       884,745       -   Subordinated debentures     79,313       77,588       -       77,588       -   Accrued interest payable     9,800       9,800       -       9,800       -                                             December 31, 2022                                         Financial assets:                                         Cash and due from banks   $ 268,315     $ 268,315     $ 268,315     $ -     $ -   Investment securities available-for-sale     634,884       634,884       242       627,293       7,349   Restricted investment in bank stocks     46,604       n/a       n/a       n/a       n/a   Equity securities     15,811       15,811       9,733       6,078       -   Net loans     8,009,176       7,723,378       -       -       7,723,378   Derivatives - interest rate contracts     56,797       56,797       -       56,797       -   Accrued interest receivable     46,062       46,062       -       4,685       41,377                                             Financial liabilities:                                         Noninterest-bearing deposits     1,501,614       1,501,614       1,501,614       -       -   Interest-bearing deposits     5,855,008       5,811,291       3,460,818       2,350,473       -   Borrowings     857,622       854,698       .       854,698       -   Subordinated debentures     153,255       153,581       -       153,581       -   Accrued interest payable     6,925       6,925       -       6,925       -     35 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 6. Fair Value Measurements and Fair Value of Financial Instruments –  (continued)   The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. The fair value of commitments to originate loans is immaterial and not included in the tables above.   Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values.   The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company’s core deposit base is required by FASB ASC 825 - 10.   Fair value estimates are based on existing balance sheet financial instruments, without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, there are certain significant assets and liabilities that are not considered financial assets or liabilities, such as deferred taxes, premises and equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.   Management believes that reasonable comparability between financial institutions may not be likely, due to the wide range of permitted valuation techniques and numerous estimates which must be made, given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.     Note 7. Comprehensive (Loss) Income      Total comprehensive (loss) income includes all changes in equity during a period from transactions and other events and circumstances from non-owner sources. The Company’s other comprehensive income is comprised of unrealized holding gains and losses on securities available-for-sale, unrealized gains (losses) on cash flow hedges, obligations for defined benefit pension plan and an adjustment to reflect the curtailment of the Company’s defined benefit pension plan, each net of taxes.   The following table represents the reclassification out of accumulated other comprehensive (loss) for the periods presented (dollars in thousands):   Details about Accumulated Other Comprehensive Income Components   Amounts Reclassified from Accumulated Other Comprehensive Income     Amounts Reclassified from Accumulated Other Comprehensive Income   Affected Line item in the Consolidated Statements of Income     Three Months Ended September 30,     Nine Months Ended September 30,         2023     2022     2023     2022     Interest income (expense) on cash flow hedges   $ 4,793     $ 1,178     $ 13,013     $ 524   Borrowings and deposits expense       (1,442 )     (343 )     (3,915 )     (159 ) Income tax (expense) benefit     $ 3,351     $ 835     $ 9,098     $ 365                                         Amortization of pension plan net actuarial losses   $ ( 74 )   $ ( 17 )   $ ( 222 )   $ ( 49 ) Other components of net periodic pension expense       22       5       67       14   Income tax benefit     $ ( 52 )   $ ( 12 )   $ ( 155 )   $ ( 35 )   Total reclassification   $ 3,299     $ 823     $ 8,943     $ 330       36 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 7.    Comprehensive (Loss) Income – (continued)     Accumulated other comprehensive loss as of September 30, 2023 and December 31, 2022 consisted of the following:       September 30, 2023     December 31, 2022       (dollars in thousands)   Investment securities available-for-sale, net of tax   $ ( 87,748 )   $ ( 61,775 ) Cash flow hedge, net of tax     37,128       32,360   Defined benefit pension and post-retirement plans, net of tax     ( 2,794 )     ( 2,949 ) Total   $ ( 53,414 )   $ ( 32,364 )     Note 8.    Stock-based Compensation     The Company’s stockholders approved the 2017 Equity Compensation Plan (“the Plan”) on May 23, 2017.  The Plan eliminates all remaining issuable shares under previous plans and is the only outstanding plan as of September 30, 2023 . On May 30, 2023, the Company's stockholders approved an amendment to the Plan that increased the maximum number of shares issuable by 450,000 . The maximum number of shares of common stock or equivalents which may be issued under the Plan is now  1,200,000 . Grants under the Plan can be in the form of stock options (qualified or non-qualified), restricted shares, deferred stock units or performance units. Shares available for grant and issuance under the Plan as of September 30, 2023  were approximately  469,501 . The Company intends to issue all shares under the Plan in the form of newly issued shares.   Restricted stock, options and deferred stock units typically have a three -year vesting period starting one year after the date of grant with one - third vesting each year. The options generally expire ten years from the date of grant. Restricted stock and deferred stock units granted to new employees and board members may be granted with shorter vesting periods. Grants of performance units typically have a cliff vesting after three years or upon a change of control. All issuances are subject to forfeiture if the recipient is no longer employed prior to the award's vesting. Any forfeitures would result in previously recognized expense being reversed. Restricted stock grants have the same dividend and voting rights as common stock, while options, performance units and deferred stock units do not.   All awards are issued at the fair value of the underlying shares at the grant date. The Company expenses the cost of the awards, which is determined to be the fair market value of the awards at the date of grant, ratably over the vesting period. Forfeiture rates are not estimated but are recorded as incurred. Stock-based compensation expense for the three and nine  months ended September 30, 2023  was $ 1.3  million and $ 3.6  million, respectively.  Stock-based compensation expense for the three and nine  months ended September  30, 2022  was $ 1.2  million and $ 3.5  million, respectively.       Activity under the Company’s options for the nine months ended September 30, 2023 was as follows:       Number of Stock Options     Weighted-Average Exercise Price   Outstanding as of December 31, 2022     8,680     $ 12.95   Exercised     ( 7,388 )     12.73   Forfeited/cancelled/expired     ( 1,292 )     14.24   Outstanding as of September 30, 2023     -       -   Exercisable as of September 30, 2023     -     $ -       37 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 8.    Stock-Based Compensation – (continued)     Activity under the Company’s restricted stock for the nine months ended September 30, 2023 was as follows:       Nonvested Shares     Weighted Average Grant Date Fair Value   Nonvested as of December 31, 2022     85,931     $ 26.20   Granted     93,147       16.19   Vested     ( 47,067 )     27.59   Forfeited/cancelled/expired     ( 9,090 )     21.76   Nonvested as of September 30, 2023     122,921     $ 18.41     As of September 30, 2023 , there was approximately $ 1.1  million of total unrecognized compensation cost related to nonvested restricted stock granted. The cost is expected to be recognized over a weighted average period of 1.2  years.   A summary of the status of unearned performance unit awards and the change during the period is presented in the table below:       Units (expected)     Units (maximum)     Weighted Average Grant Date Fair Value   Unearned as of December 31, 2022     195,265             $ 17.98   Awarded     85,158               17.93   Vested shares     ( 116,192 )             10.77   Unearned as of September 30, 2023     164,231       233,087     $ 23.06     As of September 30, 2023 , the specific number of shares related to performance units that were expected to vest was 164,231 , determined by actual performance in consideration of the established range of the performance targets, which is consistent with the level of expense currently being recognized over the vesting period. Should this expectation change, additional compensation expense could be recorded in future periods or previously recognized expense could be reversed. As of September 30, 2023 , the maximum amount of performance units that ultimately could vest if performance targets were exceeded is 233,087 . During the nine months ended September 30, 2023 , 116,192  shares vested. A total of 63,839  shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of performance units during the nine  months ended September  30, 2023  were  52,353  shares. As of September 30, 2023 , compensation cost of approximately $ 1.8  million related to non-vested performance units not yet recognized is expected to be recognized over a weighted-average period of 1.9  years.   A summary of the status of unearned deferred stock units and the changes in deferred stock units during the period is presented in the table below:       Units (expected)     Weighted Average Grant Date Fair Value   Unearned as of December 31, 2022     120,035     $ 23.84   Awarded     146,857       18.97   Vested shares     ( 78,544 )     19.71   Unearned as of September 30, 2023     188,348     $ 21.77     Any forfeitures would result in previously recognized expense being reversed. A portion of the shares that vest will be netted out to satisfy the tax obligations of the recipient. During the nine months ended September 30, 2023 , 78,544  shares vested. A total of 42,538  shares were netted from the vested shares to satisfy employee tax obligations. The net shares issued from vesting of deferred stock units during the nine months ended September 30, 2023 were 36,006  shares. As of September 30, 2023 , compensation cost of approximately $ 2.3  million related to non-vested deferred stock units, not yet recognized, is expected to be recognized over a weighted-average period of 1.5  years.   38 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     Note 9.    Components of Net Periodic Pension Cost   The Company maintained a non-contributory defined benefit pension plan for substantially all of its employees until June 30, 2007, at which time the Company froze the plan. The following table sets forth the net periodic pension cost of the Company’s pension plan for the periods indicated.       Three Months Ended   Affected Line Item in the Consolidated     September 30,   Statements of Income     2023     2022         (dollars in thousands)     Service cost   $ -     $ -     Interest cost     110       78   Other components of net periodic pension expense Expected return on plan assets     ( 209 )     ( 237 ) Other components of net periodic pension expense Net amortization     74       17   Other components of net periodic pension expense Total periodic pension income   $ ( 25 )   $ ( 142 )         Nine Months Ended   Affected Line Item in the Consolidated     September 30,   Statements of Income     2023     2022         (dollars in thousands)     Service cost   $ -     $ -     Interest cost     330       233   Other components of net periodic pension expense Expected return on plan assets     ( 628 )     ( 711 ) Other components of net periodic pension expense Net amortization     222       49   Other components of net periodic pension expense Total periodic pension income   $ ( 76 )   $ ( 429 )     Contributions   The Company did not contribute to the Pension Trust during the nine months ended September 30, 2023 . The Company does not plan on contributing amounts to the Pension Trust for the remainder of 2023. The trust is established to provide retirement and other benefits for eligible employees and their beneficiaries. No part of the trust assets may be applied to any purpose other than providing benefits under the plan and for defraying expenses of administering the plan and the trust.     Note 10. FHLB Borrowings   The Company’s FHLB borrowings and weighted average interest rates are summarized below:       September 30, 2023     December 31, 2022       Amount     Rate     Amount     Rate       (dollars in thousands)   By remaining period to maturity:                                 Less than 1 year   $ 835,000       5.60 %   $ 830,000       4.42 % 1 year through less than 2 years     25,000       1.00       -       -   2 years through less than 3 years     2,050       2.23       25,000       1.00   3 years through less than 4 years     -       -       2,050       2.23   4 years through 5 years     25,301       4.16       326       2.85   After 5 years     302       2.96       326       2.96   FHLB borrowings - gross     887,653       5.42 %     857,702       4.32 % Fair value discount     ( 63 )             ( 80 )         Total FHLB borrowings   $ 887,590             $ 857,622             39 Table of Contents CONNECTONE BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)   Note 10. FHLB Borrowings – (continued)     The FHLB borrowings are secured by pledges of certain collateral including, but not limited to, U.S. government and agency mortgage-backed securities and a blanket assignment of qualifying first lien mortgage loans, consisting of both residential mortgages and commercial real estate loans.   Advances are payable at stated maturity, with a prepayment penalty for fixed rate advances. All FHLB advances bear fixed rates. The advances as of September 30, 2023 were primarily collateralized by approximately $ 2.8  billion of commercial mortgage loans and securities, net of required over collateralization amounts, under a blanket lien arrangement. As of September 30, 2023 the Company had remaining borrowing capacity of approximately $ 1.4  billion at FHLB.      Note 11. Subordinated Debentures   During 2003, the Company formed a statutory business trust, which exists for the exclusive purpose of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust securities in junior subordinated deferrable interest debentures (subordinated debentures) of the Company; and (iii) engaging in only those activities necessary or incidental thereto. On December 19, 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly-owned subsidiary of the Parent Corporation issued $ 5.0 million of MMCapS capital securities to investors due on January 23, 2034. The capital securities presently qualify as Tier I capital. The trust loaned the proceeds of this offering to the Company and received in exchange $ 5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or in part prior to maturity. The floating interest rate on the subordinate debentures was previously  three -month LIBOR plus 2.85 % and reprices quarterly. Upon the cessation of publication of LIBOR rates and pursuant to the Federal LIBOR Act and Federal Reserve regulations implementing the Act, applicable US Dollar LIBOR indexed instruments like the Company’s outstanding $ 5.0 million of MMCapS capital securities converted effective June 30, 2023  to a new index based on CME Term SOFR, as defined in the LIBOR Act, plus a tenor spread adjustment, which is referred to as the Benchmark Replacement. Therefore, effective for quarterly interest rate resets after  July 3, 2023 the subordinated debentures’ floating rate will be three -month CME Term SOFR plus 2.85 % plus a tenor spread adjust of 0.26161 %. The rate as of September  30, 2023  was 8.48 %. These subordinated debentures and the related income effects are not eliminated in the consolidated financial statements, as the statutory business trust is not consolidated in accordance with FASB ASC 810 - 10. Distributions on the subordinated debentures owned by the subsidiary trust have been classified as interest expense in the Consolidated Statements of Income.   The following table summarizes the mandatory redeemable trust preferred securities of the Company’s Statutory Trust II as of September 30, 2023 and December 31, 2022 .   As of September 30, 2023 Issuance Date   Securities Issued   Liquidation Value   Coupon Rate   Maturity   Redeemable by Issuer Beginning 12/19/2003   $ 5,000,000   $1,000 per Capital Security   Floating 3-month CME Term SOFR + 285 Basis Points + 26.161 Basis Points   1/23/2034   1/23/2009                       As of December 31, 2022 Issuance Date   Securities Issued   Liquidation Value   Coupon Rate   Maturity   Redeemable by Issuer Beginning 12/19/2003   $ 5,000,000   $1,000 per Capital Security   Floating 3-month CME Term SOFR + 285 Basis Points   1/23/2034   1/23/2009                         On June 10, 2020, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75 % annually from, and including, the date of initial issuance up to, but excluding, June 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 2020. From and including June 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.   On January 11, 2018, the Parent Corporation issued $ 75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2018 Notes”). The 2018 Notes bore interest at a rate that resets quarterly to an interest rate per annum equal to the then current three -month LIBOR rate plus 284 basis points ( 2.84 %) payable quarterly in arrears. Interest on the 2018 Notes was to be paid on February 1, May 1, August 1, and November 1, of each year to but excluding the stated maturity date, unless in any case previously redeemed. The 2018 Notes were redeemed in full on February 1, 2023.   40 Table of Contents     Item 2. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations   The purpose of this analysis is to provide the reader with information relevant to understanding and assessing the Company’s results of operations for the periods presented herein and financial condition as of September 30, 2023 and December 31, 2022. In order to fully understand this analysis, the reader is encouraged to review the consolidated financial statements and accompanying notes thereto appearing elsewhere in this report.   Cautionary Statement Concerning Forward-Looking Statements   This report includes forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and 21E of the Securities Exchange Act of 1934, as amended, that involve inherent risks and uncertainties. This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of ConnectOne Bancorp Inc. and its subsidiaries, including statements preceded by, followed by, or that include words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain,” “pattern” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions may increase significantly; (2) changes in the interest rate environment may reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and credit loss provisions may vary substantially from period to period; (4) general economic conditions may be less favorable than expected; (5) political developments, sovereign debt problems, wars or other hostilities such as the ongoing conflict between Ukraine and Russia and instability in the Middle East, may disrupt or increase volatility in securities markets or other economic conditions; (6) legislative or regulatory changes or actions may adversely affect the businesses in which ConnectOne Bancorp is engaged; (7) changes and trends in the securities markets may adversely impact ConnectOne Bancorp; (8) a delayed or incomplete resolution of regulatory issues could adversely impact planning by ConnectOne Bancorp; (9) the impact on reputation risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity could be significant; (10) the outcome of regulatory and legal investigations and proceedings may not be anticipated, and (11) the impact of the COVID-19 pandemic on our employees and operations, and those of our customers. Further information on other factors that could affect the financial results of ConnectOne Bancorp is included in Item 1a. of ConnectOne Bancorp’s Annual Report on Form 10-K as amended and updated in ConnectOne Bancorp’s other filings with the Securities and Exchange Commission. These documents are available free of charge at the Commission’s website at http://www.sec.gov and/or from ConnectOne Bancorp, Inc.   Critical Accounting Policies and Estimates   Our accounting policies are integral to understanding the results reported. We consider accounting policies that require management to exercise significant judgment or discretion or to make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. As of June 30, 2023, there have been no material changes to our critical accounting policies as compared to the critical accounting policies disclosed in our most recent Annual Report on Form 10-K. Reference is made to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.   41 Table of Contents   Operating Results Overview   Net income available to common stockholders for the three months ended September 30, 2023 was $19.9 million compared to $27.4 million for the comparable three-month period ended September 30, 2022. The Company’s diluted earnings per share were $0.51 for the three months ended September 30, 2023 as compared with diluted earnings per share of $0.70 for the comparable three-month period ended September 30, 2022. The $7.5 million decrease in net income available to common stockholders and $0.19 decrease in diluted earnings per share versus the third quarter of 2022 were due to a $15.8 million decrease in net interest income and a $3.6 million increase in noninterest expenses, partially offset by a $8.5 million decrease in provision for credit losses, a $3.2 million decrease in income tax expense and a $0.2 million increase in noninterest income.   Net income available to common stockholders for the nine months ended September 30, 2023 was $63.2 million compared to $88.1 million for the comparable nine-month period ended September 30, 2022. The Company’s diluted earnings per share were $1.61 for the nine months ended September 30, 2023 as compared with diluted earnings per share of $2.23 for the comparable nine-month period ended September 30, 2022. The $24.9 million decrease in net income available to common stockholders and $0.62 decrease in diluted earnings per share versus the nine months ended September 2022 were due to a $30.8 million decrease in net interest income and a $13.0 million increase in noninterest expenses, partially offset by an $8.9 million decrease in provision for credit losses, a $9.9 million decrease in income tax expense and a $0.1 million increase in noninterest income.   Net Interest Income and Margin   Net interest income is the difference between the interest earned on the portfolio of earning assets (principally loans and investments) and the interest paid on deposits and borrowings, which support these assets. Net interest income is presented on a tax-equivalent basis by adjusting tax-exempt income (including interest earned on tax-free loans and on obligations of state and local political subdivisions) by the amount of income tax which would have been paid had the assets been invested in taxable assets. Net interest margin is defined as net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets.   Fully taxable equivalent net interest income for the three months ended September 30, 2023 decreased by $15.6 million, or 19.8%, from the comparable three-month period ended September 30, 2022. The decrease from the three months ended September 30, 2022 resulted primarily from a 250 basis-point increase in rate paid on interest-bearing deposits, partially offset by an 88 basis-point increase rate earned on total interest-earning assets and a 92 basis-point contraction of the net interest margin to 2.76% from 3.68%.   Fully taxable equivalent net interest income for the nine months ended September 30, 2023 decreased by $30.2 million, or 13.4%, from the comparable nine-month period ended September 30, 2022. The decrease from the nine months ended September 30, 2022 resulted primarily from a 254 basis-point increase in rate paid on interest-bearing deposits, partially offset by a 92 basis increase in rate earned on total interest-earning assets and a 91 basis-point contraction of the net interest margin to 2.85% from 3.76%.   42 Table of Contents   The following tables, “Average Statements of Condition with Interest and Average Rates”, present for the three and nine months ended September 30, 2023 and 2022, the Company’s average assets, liabilities and stockholders’ equity. The Company’s net interest income, net interest spread and net interest margin are also reflected.   Average Statements of Condition with Interest and Average Rates       Three Months Ended September 30,       2023     2022               Interest                     Interest               Average     Income/     Average     Average     Income/     Average       Balance     Expense     Rate (7)     Balance     Expense     Rate (7)       (dollars in thousands)   Interest-earning assets:                                                 Securities (1) (2)   $ 723,408     $ 5,566       3.05 %   $ 740,394     $ 5,434       2.91 % Total loans (2) (3) (4)     8,169,310       115,954       5.63       7,582,371       91,132       4.77   Federal funds sold and interest-bearing with banks     158,155       2,110       5.29       135,331       665       1.95   Restricted investment in bank stocks     38,558       907       9.33       42,220       438       4.12   Total interest-earning assets     9,089,431       124,537       5.44       8,500,316       97,669       4.56   Noninterest-earning assets:                                                 Allowance for credit losses     (89,966 )                     (84,307 )                 Other noninterest-earning assets     626,160                       614,580                   Total assets   $ 9,625,625                     $ 9,030,589                                                                     Interest-bearing liabilities:                                                 Interest-bearing deposits:                                                 Time deposits   $ 2,606,122       25,437       3.87     $ 1,525,076       5,396       1.40   Other interest-bearing deposits     3,723,561       30,606       3.26       3,686,520       7,903       0.85   Total interest-bearing deposits     6,329,683       56,043       3.51       5,211,596       13,299       1.01                                                     Borrowings     651,112       3,950       2.41       772,561       3,297       1.69   Subordinated debentures     79,230       1,312       6.57       153,129       2,196       5.69   Finance lease     1,603       24       5.94       1,813       27       5.91   Total interest-bearing liabilities     7,061,628       61,329       3.45       6,139,099       18,819       1.22                                                     Demand deposits     1,275,325                       1,682,135                   Other liabilities     86,025                       48,907                   Total noninterest-bearing liabilities     1,361,350                       1,731,042                   Stockholders’ equity     1,202,647                       1,160,448                   Total liabilities and stockholders’ equity   $ 9,625,625                     $ 9,030,589                   Net interest income (tax-equivalent basis)             63,208                       78,850           Net interest spread (5)                     1.99 %                     3.34 % Net interest margin (6)                     2.76 %                     3.68 % Tax-equivalent adjustment             (851 )                     (689 )         Net interest income           $ 62,357                     $ 78,161             (1) Average balances are based on amortized cost and include equity securities.   (2) Interest income is presented on a tax-equivalent basis using a 21% assumed tax rate.   (3) Includes loan fee income and accretion of purchase accounting adjustments.   (4) Total loans include loans held-for-sale and nonaccrual loans.   (5) Represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.   (6) Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.   (7) Rates are annualized.     43 Table of Contents       Nine Months Ended September 30,       2023     2022               Interest                     Interest               Average     Income/     Average     Average     Income/     Average       Balance     Expense     Rate (7)     Balance     Expense     Rate (7)       (dollars in thousands)   Interest-earning assets:                                                 Securities (1) (2)   $ 727,516     $ 16,784       3.08 %   $ 632,736     $ 11,915       2.52 % Total loans (2) (3) (4)     8,150,047       334,810       5.49       7,159,107       249,049       4.65   Federal funds sold and interest-bearing with banks     242,262       9,141       5.04       200,937       1,098       0.73   Restricted investment in bank stocks     43,757       2,750       8.40       32,997       943       3.82   Total interest-earning assets     9,163,582       363,485       5.30       8,025,777       263,005       4.38   Noninterest-earning assets:                                                 Allowance for credit losses     (89,206 )                     (81,711 )                 Other noninterest-earning assets     622,750                       600,171                   Total assets   $ 9,697,126                     $ 8,544,237                                                                     Interest-bearing liabilities:                                                 Interest-bearing deposits:                                                 Time deposits   $ 2,541,620       66,482       3.50     $ 1,252,503       9,729       1.04   Other interest-bearing deposits     3,641,362       80,362       2.95       3,751,266       14,289       0.51   Total interest-bearing deposits     6,182,982       146,844       3.18       5,003,769       24,018       0.64                                                     Borrowings     781,831       15,986       2.73       576,728       6,522       1.51   Subordinated debentures     87,234       4,921       7.54       153,054       6,543       5.72   Finance lease     1,658       73       5.89       1,865       84       6.02   Total interest-bearing liabilities     7,053,705       167,824       3.18       5,735,416       37,167       0.87                                                     Demand deposits     1,360,120                       1,612,713                   Other liabilities     86,291                       50,834                   Total noninterest-bearing liabilities     1,446,411                       1,663,547                   Stockholders’ equity     1,197,010                       1,145,274                   Total liabilities and stockholders’ equity   $ 9,697,126                     $ 8,544,237                   Net interest income (tax-equivalent basis)             195,661                       225,838           Net interest spread (5)                     2.12 %                     3.51 % Net interest margin (6)                     2.85 %                     3.76 % Tax-equivalent adjustment             (2,377 )                     (1,728 )         Net interest income           $ 193,284                     $ 224,110             (1) Average balances are based on amortized cost and include equity securities.   (2) Interest income is presented on a tax-equivalent basis using a 21% assumed tax rate.   (3) Includes loan fee income and accretion of purchase accounting adjustments.   (4) Total loans include loans held-for-sale and nonaccrual loans.   (5) Represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a tax- equivalent basis.   (6) Represents net interest income on a tax-equivalent basis divided by average total interest-earning assets.   (7) Rates are annualized.     44 Table of Contents   Noninterest Income   Noninterest income totaled $3.6 million for the three months ended September 30, 2023, compared with $3.3 million for the three months ended September 30, 2022. Included in noninterest income for the three months ended September 30, 2023 and September 30, 2022 were net losses on equity securities of $0.3 million and $0.4 million, respectively. Excluding these items, noninterest income increased $0.1 million when compared to the three months ended September 30, 2022. The increase was primarily attributable to an increase in net gains on sale of loans held-for-sale, primarily Small Business Administration (“SBA”) loans of $0.4 million and an increase in bank owned life insurance ("BOLI") income of $0.1 million, partially offset by a decrease in deposit, loan, and other income of $0.4 million.     Noninterest income totaled $9.8 million for the nine months ended September 30, 2023, compared with $9.7 million for the nine months ended September 30, 2022. Included in noninterest income were net losses on equity securities of $0.7 million and $1.4 million for the nine months ended September 30, 2023 and September 30, 2022, respectively. Excluding these items, noninterest income decreased $0.7 million when compared to the nine months ended September 30, 2022. The decrease was primarily attributable to a decreases in deposit, loan and other income of $1.0 million and a decrease in net gains on sale of loans held-for-sale, primarily SBA, of $0.3 million, partially offset by an increase in BOLI income of $0.6 million.   Noninterest Expenses   Noninterest expenses totaled $35.8 million for the three months ended September 30, 2023, compared with $32.1 million for the three months ended September 30, 2022. Noninterest expenses increased by $3.6 million when compared to the three months ended September 30, 2022. The increase was primarily attributable to an increase in salaries and employee benefits of $1.3 million, which was attributable to new hires, an increase in FDIC insurance expense of $1.1 million, which was attributable to balance sheet growth and a two-basis point increase in the Bank’s initial base rate, an increase in information technology and communication expenses of $0.7 million, which was primarily attributable to additional investments in technology, equipment, and software, an increase in other expenses of $0.4 million, an increase in occupancy and equipment of $0.1 million, an increase in marketing and advertising expenses of $0.1 million and an increase in other components of net periodic pension expense of $0.1 million, partially offset by a decrease in professional and consulting of $0.1 million and a decrease in amortization of core deposit intangibles of $0.1 million.   Noninterest expenses totaled $106.1 million for the nine months ended September 30, 2023, compared to $93.1 million for the nine months ended September 30, 2022. Noninterest expenses increased by $13.0 million when compared to the nine months ended September 30, 2022. The increase was primarily attributable to an increase in salaries and employee benefits of $6.8 million, which was attributable to new hires, an increase in FDIC insurance expense of $2.4 million, which was attributable to balance sheet growth and a two-basis point increase in the Bank’s initial base rate, an increase in information technology and communication expenses of $1.8 million, which was primarily attributable to additional investments in technology, equipment, and software, an increase in other expenses of $2.0 million, which was primarily attributable to expenses incurred related to derivatives cash collateral during the nine months ended September 30, 2023, an increase in occupancy and equipment of $0.9 million, an increase in marketing and advertising expenses of $0.4 million and an increase in other components of net periodic pension expense of $0.4 million, partially offset by a decrease in BoeFly acquisition expense of $1.5 million and a decrease in amortization of core deposit intangibles of $0.2 million.   Income Taxes   Income tax expense was $7.2 million for the three months ended September 30, 2023, compared to $10.4 million for the three months ended September 30, 2022. The decrease in income tax expense was the result of lower income before income tax expense. The effective tax rate for the three months ended September 30, 2023 and September 30, 2022 was 25.2% and 26.5%, respectively. The decrease in the effective tax rate when compared to the three months ended September 30, 2022 is largely attributable to lower taxable income.   Income tax expense was $23.7 million for the nine months ended September 30, 2023, compared to $33.7 million for the nine months ended September 30, 2022. The effective tax rate for the nine months ended September 30, 2023 and September 30, 2022 was 26.0% and 26.7%, respectively. The decrease in the effective tax rate when compared to the nine months ended September 30, 2022 is largely attributable to lower taxable income.   45 Table of Contents   Financial Condition   Loan Portfolio   The following table sets forth the composition of our loan portfolio, excluding loans held-for-sale and unearned net origination fees and costs, by loan segment at the periods indicated.       September 30, 2023     December 31, 2022     Amount Increase/       Amount     %     Amount     %     (Decrease)       (dollars in thousands)   Commercial   $ 1,475,571       18.0     $ 1,472,734       18.2 %   $ 2,837   Commercial real estate     5,837,539       71.3       5,795,228       71.5       42,311   Commercial construction     622,748       7.6       574,139       7.1       48,609   Residential real estate     251,416       3.1       264,748       3.3       (13,332 ) Consumer     936       -       2,312       -       (1,376 ) Gross loans   $ 8,188,210       100.0 %   $ 8,109,161       100.0 %   $ 79,049     As of September 30, 2023, gross loans totaled $8.2 billion, an increase of $79.0  million or 1.0%, compared to December 31, 2022. Net loan growth was attributable to organic loan originations.   Allowance for Credit Losses and Related Provision   As of September 30, 2023, the Company’s allowance for credit losses for loans was $88.2 million, a decrease of $2.3 million from $90.5 million as of December 31, 2022. The decrease was primarily attributable to $8.0 million in net charge-offs, offset by a $5.7 million provision for credit losses.     The provision for credit losses, which includes a provision for unfunded commitments, for the three and nine months ended September 30, 2023 and September 30, 2022 was $1.5 million and $5.5 million, respectively, compared to $10.0 million and $14.5 million, for the three and nine months ended September 30, 2022, respectively. The decrease in the provision for credit losses when compared to the comparable periods in 2022 was mainly attributable to changes in forecasted macroeconomic conditions.     There were $2.5 million and $8.1 million in net charge-offs for the three and nine months ended September 30, 2023, compared with $0.4 million and $0.9 million in net charge-offs for the three and nine months ended September 30, 2022, respectively. The increase in net charge-offs for the three ended September 30, 2023 when compared to the comparable prior period resulted from the partial charge-off of one commercial loan that we previously reserved for.  The increase in net charge-offs for the nine months ended September 30, 2023 when compared to the comparable prior period resulted from the aforementioned partial charge-off during the third quarter of 2023, the resolution of certain nonaccrual taxi loans and one owner-occupied commercial real estate loan that were previously reserved for and, therefore, required no additional loan loss provisioning. The ACL as a percentage of loans receivable amounted to 1.08% as of September 30, 2023 compared to 1.12% as of December 31, 2022.   The level of the allowance for the respective periods of 2023 and 2022 reflects the credit quality within the loan portfolio, loan growth, the changing composition of the commercial and residential real estate loan portfolios and other related factors. In management’s view, the level of the ACL as of September 30, 2023 is adequate to cover credit losses inherent in the loan portfolio. Management’s judgment regarding the adequacy of the allowance constitutes a “Forward-Looking Statement” under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management’s analysis, based principally upon the factors considered by management in establishing the allowance.   46 Table of Contents   Changes in the ACL on loans are presented in the following table for the periods indicated.       Three Months Ended       September 30,       2023     2022       (dollars in thousands)   Average loans receivable   $ 8,169,139     $ 7,580,176   Analysis of the ACL:                 Balance - beginning of quarter   $ 89,205     $ 82,739   Charge-offs:                 Commercial     (2,250 )     (410 ) Commercial real estate     (237 )     -   Residential real estate     -       -   Consumer     -       (3 ) Total charge-offs     (2,487 )     (413 ) Recoveries:                 Commercial     -       53   Residential real estate     1       -   Consumer     7       -   Total recoveries     8       53   Net charge-offs     (2,479 )     (360 ) Provision for credit losses – loans     1,504       9,338   Balance - end of period   $ 88,230     $ 91,717                     Ratio of annualized net charge-offs during the period to average loans receivable during the period     0.12 %     0.02 % Loans receivable   $ 8,181,109     $ 7,900,450   ACL as a percentage of loans receivable     1.08 %     1.16 %       Nine Months Ended       September 30,       2023     2022       (dollars in thousands)   Average loans receivable   $ 8,142,712     $ 7,155,209   Analysis of the ACL:                 Balance - beginning of quarter   $ 90,513     $ 78,773   Charge-offs:                 Commercial     (6,117 )     (751 ) Commercial real estate     (1,954 )     (226 ) Residential real estate     (18 )     (9 ) Consumer     -       (3 ) Total charge-offs     (8,089 )     (989 ) Recoveries:                 Commercial     9       54   Residential real estate     69       35   Consumer     7       28   Total recoveries     85       117   Net charge-offs     (8,004 )     (872 ) Provision for credit losses – loans     5,721       13,816   Balance - end of period   $ 88,230     $ 91,717                     Ratio of annualized net charge-offs during the period to average loans receivable during the period     0.13 %     0.02 % Loans receivable   $ 8,181,109     $ 7,900,450   ACL as a percentage of loans receivable     1.08 %     1.16 %   47 Table of Contents   Asset Quality   The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that includes analysis of credit requests and ongoing examination of outstanding loans, delinquencies, and potential problem loans, with particular attention to portfolio dynamics and mix. The Company strives to identify loans experiencing difficulty early on, to record charge-offs promptly based on realistic assessments of current collateral values and cash flows, and to maintain an adequate allowance for credit losses at all times.   It is generally the Company’s policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on nonaccrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on nonaccrual loans are generally applied against principal. A loan may be restored to an accruing basis when all past due amounts have been collected. Loans past due 90 days or more which are both well-secured and in the process of collection may remain on an accrual basis.   Nonperforming assets include nonaccrual loans and other real estate owned. Nonaccrual loans represent loans on which interest accruals have been suspended. In general, it is the policy of management to consider the charge-off of uncollectible amounts of loans at the point they become past due 90 days.   The following table sets forth, as of the dates indicated, the amount of the Company’s nonperforming assets:       September 30, 2023     December 31, 2022       (dollars in thousands)   Nonaccrual loans   $ 56,059     $ 44,454   OREO     -       264   Total nonperforming assets (1)   $ 56,059     $ 44,718                       (1) Nonperforming assets are defined as nonaccrual loans and OREO.   Nonaccrual loans to total loans receivable     0.69 %     0.55 % Nonperforming assets to total assets     0.58 %     0.46 %   48 Table of Contents   Investment Securities   As of September 30, 2023, the principal components of the securities portfolio were federal agency obligations, mortgage-backed securities, obligations of U.S. states and political subdivisions, corporate bonds and notes, asset-backed securities and equity securities. For the three-months ended September 30, 2023, average securities, on an amortized cost basis, decreased by $17.0 million to approximately $723.4 million, or 8.0% of average total interest-earning assets, from approximately $740.4 million, or 8.7% of average interest-earning assets, as of September 30, 2022.   As of September 30, 2023, net unrealized losses on securities available-for-sale, which are carried as a component of accumulated other comprehensive loss and included in stockholders’ equity, net of tax, amounted to $87.7 million as compared with net unrealized losses of $61.8 million as of December 31, 2022. The increase in unrealized losses is predominately attributable to changes in market conditions and interest rates. Unrealized losses have not been recognized into income because the issuers are of high credit quality, we do not intend to sell, and it is likely that we will not be required to sell the securities prior to their anticipated recovery.  The decline in fair value is largely due to changes in interest rates and other market conditions. This also resulted in a $10.1 million increase in deferred tax assets, attributable to the decline in fair value on securities available-for-sale since December 31, 2022. The issuers continue to make timely principal and interest payments on the securities. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. The Company did not record an allowance for credit losses for available-for-sale securities as of September 30, 2023.   Interest Rate Sensitivity Analysis   The principal objective of our asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts; determine the level of risk appropriate given our business focus, operating environment, and capital and liquidity requirements; establish prudent asset concentration guidelines; and manage the risk consistent with Board approved guidelines. We seek to reduce the vulnerability of our operations to changes in interest rates, and actions in this regard are taken under the guidance of the Bank’s Asset Liability Committee (the “ALCO”). The ALCO generally reviews our liquidity, cash flow needs, maturities of investments, deposits and borrowings, and current market conditions and interest rates.   The Company utilizes a number of strategies to manage interest rate risk including, but not limited to: (i) balancing the types and structures of interest-earning assets and interest-bearing liabilities by diversifying mix, coupons, maturities and/or repricing characteristics, (ii) reducing the overall interest rate sensitivity of liabilities by emphasizing core and/or longer-term deposits; utilizing FHLB advances and wholesale deposits for our interest rate risk profile, (iii) managing the investment portfolio for liquidity and interest rate risk profile, and (iv) entering into interest rate swap and cap agreements.   We currently utilize net interest income simulation and economic value of equity (“EVE”) models to measure the potential impact to the Bank of future changes in interest rates. As of September 30, 2023 and December 31, 2022, the results of the models were within guidelines prescribed by our Board of Directors. If model results were to fall outside prescribed ranges, action, including additional monitoring and reporting to the Board, would be required by the ALCO and the Bank’s management.   The net interest income simulation model attempts to measure the change in net interest income over the next one-year period, and over the next three-year period on a cumulative basis, assuming certain changes in the general level of interest rates.   Based on our model, which was run as of September 30, 2023, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 8.20%, while a 100 basis-point instantaneous decrease in interest rates would increase net interest income by 4.98%. As of December 31, 2022, we estimated that over the next one-year period a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 2.22%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 2.01%.   Based on our model, which was run as of September 30, 2023, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 5.89%, while a 100 basis-point instantaneous decrease in interest rates would increase net interest income by 4.68%. As of December 31, 2022, we estimated that over the next three years, on a cumulative basis, a 200 basis-point instantaneous increase in the general level of interest rates would decrease our net interest income by 2.66%, while a 100 basis-point instantaneous decrease in interest rates would decrease net interest income by 3.99%.   49 Table of Contents   An EVE analysis is also used to dynamically model the present value of asset and liability cash flows with instantaneous rate shocks of up 200 basis points and down 100 basis points. The economic value of equity is likely to be different as interest rates change. Our EVE as of September 30, 2023, would decrease by 16.49% with an instantaneous rate shock of up 200 basis points, and increase by 8.66% with an instantaneous rate shock of down 100 basis points. Our EVE as of December 31, 2022, would decrease by 10.51% with an instantaneous rate shock of up 200 basis points, and decrease by 1.13% with an instantaneous rate shock of down 100 basis-points.   The change in interest rate sensitivity was impacted by changes in overall market interest rates, updates to certain model assumptions, changes in short and intermediate-term fixed rate funding and by the deposit mix shift into certificates of deposit, from both noninterest-bearing and interest-bearing non-maturity deposits.   The following table illustrates the most recent results for EVE and one-year NII sensitivity as of September 30, 2023.   Interest Rates     Estimated     Estimated Change in EVE     Interest Rates     Estimated     Estimated Change in NII   (basis points)     EVE     Amount     %     (basis points)     NII     Amount     %   +300     $ 817,231       (270,740 )     (24.88 )     +300     $ 228,618     $ (33,287 )     (12.71 ) +200       908,543       (179,428 )     (16.49 )     +200       240,419       (21,486 )     (8.20 ) +100       1,009,054       (78,917 )     (7.25 )     +100       252,499       (9,406 )     (3.59 ) 0       1,087,971       -       -       0       261,905       -       -   -100       1,182,198       94,227       8.66       -100       274,945       13,040       4.98   -200       1,218,810       130,839       12.03       -200       278,365       16,460       6.28   -300       1,251,200       163,229       15.00       -300       281,872       19,967       7.62     Certain model limitations are inherent in the methodology used in the EVE and net interest income measurements. The models require the making of certain assumptions which may tend to oversimplify the way actual yields and costs respond to changes in market interest rates. The models assume that the composition of the Company’s interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured, thus they do not consider the Company’s strategic plans, or any other steps it may take to respond to changes in rates over the forecasted period of time. Additionally, the models assume immediate changes in interest rates, based on yield curves as of a point-in-time, which are reflected in a parallel, instantaneous and uniform manner across all yield curves, when in reality changes may rarely be of this nature. The models also utilize data derived from historical performance and as interest rates change the actual performance of loan prepayments, rate sensitivities, and average life assumptions may deviate from assumptions utilized in the models and can impact the results. Accordingly, although the above measurements provide an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to provide a precise forecast of the effect of changes in market interest rates. Given the unique nature of the post-pandemic interest rate environment, and the speed with which interest rates have been changing, the projections noted above on the Company’s EVE and net interest income and can be expected to differ from actual results.   Estimates of Fair Value   The estimation of fair value is significant to a number of the Company’s assets, including loans held-for-sale and securities available-for-sale. These are all recorded at either fair value or the lower of cost or fair value. Fair values are volatile and may be influenced by a number of factors. Circumstances that could cause estimates of the fair value of certain assets and liabilities to change include a change in prepayment speeds, discount rates, or market interest rates. Fair values for most available-for-sale securities are based on quoted market prices. If quoted market prices are not available, fair values are based on judgments regarding future expected loss experience, current economic condition risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.   Impact of Inflation and Changing Prices   The consolidated financial statements and notes thereto presented elsewhere herein have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations; unlike most industrial companies, nearly all of the Company’s assets and liabilities are monetary. As a result, interest rates have a greater impact on performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.   50 Table of Contents   Liquidity   Liquidity is a measure of a bank’s ability to fund loans, withdrawals or maturities of deposits, and other cash outflows in a cost-effective manner. Our principal sources of funds are deposits, scheduled amortization and prepayments of loan principal, maturities of investment securities, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flow and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.   As of September 30, 2023, the amount of liquid assets remained at a level management deemed adequate to ensure that, on a short and long-term basis, contractual liabilities, depositors’ withdrawal requirements, and other operational and client credit needs could be satisfied. As of September 30, 2023, liquid assets (cash and due from banks, interest-bearing deposits with banks and unencumbered investment securities) were $515.6 million, which represented 5.3% of total assets and 6.2% of total deposits and borrowings, compared to $760.0 million as of December 31, 2022, which represented 7.9% of total assets and 9.3% of total deposits and borrowings. As of September 30, 2023, not included in the above liquid assets were securities with a market value of $231.6 million which were pledged to either the Federal Reserve Bank’s Bank Term Funding Program (“BTFP”), or the Federal Home Loan Bank, which support aggregate unutilized borrowing capacity of $262.8 million as of September 30, 2023.   The Bank is a member of the Federal Home Loan Bank of New York and, based on available qualified collateral as of September 30, 2023, had the ability to borrow $2.9 billion. The Bank also has two credit facilities established with the Federal Reserve Bank of New York for direct discount window borrowings and BTFP capacity based on pledged collateral and had the ability to borrow $1.5 billion as of September 30, 2023. In addition, as of September 30, 2023, the Bank had in place borrowing capacity of $390 million through correspondent banks and other unsecured borrowing lines. As of September 30, 2023, the Bank had aggregate available and unused credit of approximately $3.3 billion, which represents the aforementioned facilities totaling $4.8 billion net of $1.5 billion in outstanding borrowings and letters of credit. As of September 30, 2023, outstanding commitments for the Bank to extend credit were approximately $1.2 billion.   Cash and cash equivalents totaled $253.3 million as of September 30, 2023, increasing by $15.0 million from $268.3 million as of December 31, 2022. Operating activities provided $64.6 million in net cash. Investing activities used $75.7 million in net cash, primarily reflecting an increase in loans and investment securities. Financing activities used $3.9 million in net cash, primarily reflecting a decrease of $2.4 billion in repayment of borrowings and $75 million in repayment of subordinated debt, partially offset by $2.4 billion in advances of FHLB borrowings and an increase in deposits of $82.1 million.   51 Table of Contents   Deposits   Total deposits increased by $81.9 million, or 1.1%, to $7.4 billion as of September 30, 2023 from December 31, 2022. The increase was primarily due to increases in interest-bearing and NOW deposits and time deposits, partially offset by a decrease in demand, noninterest-bearing deposits and savings deposits. The following table sets forth the composition of our deposit base by the periods indicated.                                       Amount       September 30, 2023     December 31, 2022     Increase/       Amount     %     Amount     %     (Decrease)       (dollars in thousands)   Demand, noninterest-bearing   $ 1,224,125       16.5 %   $ 1,501,614       20.4 %   $ (277,489 ) Demand, interest-bearing and NOW     3,318,092       44.6       3,085,613       41.9       232,479   Savings     374,067       5.0       375,205       5.1       (1,138 ) Time     2,522,211       33.9       2,394,190       32.6       128,021   Total deposits   $ 7,438,495       100.0 %   $ 7,356,622       100.0 %   $ 81,873     Subordinated Debentures   During December 2003, Center Bancorp Statutory Trust II, a statutory business trust and wholly owned subsidiary of the Parent Corporation issued $5.0 million of MMCapS capital securities to investors due on January 23, 2034. The trust loaned the proceeds of this offering to the Company and received in exchange $5.2 million of the Parent Corporation’s subordinated debentures. The subordinated debentures are redeemable in whole or part. The floating interest rate on the subordinated debentures was three-month LIBOR plus 2.85% and re-prices quarterly. Upon the cessation of publication of LIBOR rates  and pursuant to the Federal LIBOR Act and Federal Reserve regulations implementing the Act, applicable US Dollar LIBOR indexed instruments like the Company’s outstanding $5.0 million of MMCapS capital securities converted as of June 30, 2023 to a new index based on CME Term SOFR, as defined in the LIBOR Act, plus a tenor spread adjustment, which is referred to as the Benchmark Replacement. Effective for quarterly interest rate resets after July 3, 2023 the subordinated debentures’ floating rate will be three-month CME Term SOFR plus 2.85% plus a tenor spread adjust of 0.26161%. The rate as of September 30, 2023 was 8.48%.    During June 2020, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “2020 Notes”). The 2020 Notes bear interest at 5.75% annually from, and including, the date of initial issuance up to, but excluding, September 15, 2025 or the date of earlier redemption, payable semi-annually in arrears on September 15 and December 15 of each year, commencing December 15, 2020. From and including September 15, 2025 through maturity or earlier redemption, the interest rate shall reset quarterly to an interest rate per annum equal to a benchmark rate, which is expected to be Three-Month Term SOFR (as defined in the Second Supplemental Indenture), plus 560.5 basis points, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, commencing on September 15, 2025. Notwithstanding the foregoing, if the benchmark rate is less than zero, then the benchmark rate shall be deemed to be zero.   During January 2018, the Parent Corporation issued $75 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”) to certain accredited investors. The net proceeds from the sale of the Notes were used in the first quarter of 2018 for general corporate purposes, which included the Parent Corporation contributing $65 million of the net proceeds to the Bank in the form of debt and common equity. The Notes were non-callable for five years, had a stated maturity of February 1, 2028 and bore interest at a rate that reset quarterly to the current three-month LIBOR rate plus 284 basis points. The 2018 Notes were redeemed in full on February 1, 2023.   52 Table of Contents   Stockholders ’ Equity   The Company’s stockholders’ equity was $1.2 billion as of September 30, 2023, an increase of $9 million from December 31, 2022. The increase in stockholders’ equity was primarily attributable to an increase in retained earnings of $44 million, partially offset by an increase in accumulated other comprehensive losses of $21 million and an increase in treasury stock of $15 million. The increase in accumulated other comprehensive losses during 2023 resulted from higher interest rates. As of September 30, 2023, the Company’s tangible common equity ratio and tangible book value per share were 9.11% and $22.34, respectively, which improved from 9.04% and $21.71, respectively, as of December 31, 2022. Total goodwill and other intangible assets were $214.6 million as of September 30, 2023, and $215.7 million as of December 31, 2022.   The following table shows the reconciliation of common equity to tangible common equity and the tangible common equity ratio.       September 30, 2023     December 31, 2022       (dollars in thousands, except for share and per share data)   Common equity   $ 1,077,227     $ 1,067,824   Less: intangible assets     (214,594 )     (215,684 ) Tangible common stockholders’ equity   $ 862,633     $ 852,140                     Total assets   $ 9,678,885     $ 9,644,948   Less: intangible assets     (214,594 )     (215,684 ) Tangible assets   $ 9,464,291     $ 9,429,264                     Common stock outstanding at period end     38,621,970       39,243,123                     Tangible common equity ratio (1)     9.11 %     9.04 %                   Book value per common share   $ 27.89     $ 27.21   Less: intangible assets     5.55       5.50   Tangible book value per common share   $ 22.34     $ 21.71     (1) Tangible common equity ratio is a non-GAAP measure.   53 Table of Contents   Regulatory Capital and Capital Adequacy   The maintenance of a solid capital foundation is a primary goal for the Company. Accordingly, capital plans, stock repurchases and dividend policies are monitored on an ongoing basis. The Company’s objective with respect to the capital planning process is to effectively balance the retention of capital to support future growth with the goal of providing stockholders with an attractive long-term return on their investment.   The Company and the Bank are subject to regulatory guidelines establishing minimum capital standards that involve quantitative measures of assets, and certain off-balance sheet items, as risk-adjusted assets under regulatory accounting practices.   The following is a summary of regulatory capital amounts and ratios as of September 30, 2023 for the Company and the Bank, compared with minimum capital adequacy requirements and the regulatory requirements for classification as a well-capitalized depository institution (for the Bank).       ConnectOne Bancorp, Inc.     For Capital Adequacy Purposes     To Be Well-Capitalized Under Prompt Corrective Action Provisions   The Company   Amount     Ratio     Amount     Ratio     Amount     Ratio   As of September 30, 2023   (dollars in thousands)   Tier 1 leverage capital   $ 1,031,973       10.86 %   $ 380,234       4.00 %     NA       NA   CET I risk-based ratio     915,891       10.64       387,539       4.50       NA       NA   Tier 1 risk-based capital     1,031,973       11.98       516,719       6.00       NA       NA   Total risk-based capital     1,197,285       13.90       688,959       8.00       NA       NA     N/A - not applicable       ConnectOne Bank     For Capital Adequacy Purposes     To Be Well-Capitalized Under Prompt Corrective Action Provisions   The Bank   Amount     Ratio     Amount     Ratio     Amount     Ratio   As of September 30, 2023                   (dollars in thousands)                   Tier 1 leverage capital   $ 1,066,568       11.23 %   $ 379,965       4.00 %     474,956       5.00 % CET I risk-based ratio     1,066,568       12.38       387,532       4.50       559,769       6.50   Tier 1 risk-based capital     1,066,568       12.38       516,710       6.00       688,946       8.00   Total risk-based capital     1,156,880       13.43       688,946       8.00       861,183       10.00     As of September 30, 2023, both the Company and Bank satisfy the capital conservation buffer requirements applicable to them. The lowest ratio at the Company is the Total Risk Based Capital Ratio which was 3.40% above the minimum buffer ratio and, at the Bank, the lowest ratio was the Total Risk Based Capital Ratio which was 2.93% above the minimum buffer ratio.   54 Table of Contents   Item 3. Qualitative and Quantitative Disclosures about Market Risks   Market Risk   Interest rate risk management is our primary market risk.  See “Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity Analysis” herein for a discussion of our management of our interest rate risk.   55 Table of Contents